Smaller firms show growing interest in alternative risk transfer vehicles

Smaller firms are expressing  more interest in retaining their own risk and a growing interest in alternative risk transfer vehicles such as captive structures, special purpose vehicles and risk retention groups, according to broker Marsh’s 2012 Captive Benchmarking Report. We don’t cover this type of alternative risk transfer on Artemis very often, but any trend towards these risk transfer or retention solutions does signify a growing sophistication and willingness to look to alternative methods of risk transfer and financing so worth a brief discussion.

The report (available here) shows that many organisations, including smaller companies who may not be large enough to justify their own captive, are increasingly looking at retaining some of their risk. Marsh expects this to increase interest in multi-owner captives in 2012 and beyond. The report shows a greater number of multi-owner captive structures being formed in recent years including rent-a-captives, protected cell companies, and risk retention groups. These vehicles not only formalize risk finance but can operate at lower cost, and with lower cost of capital requirements, than traditional single-parent captives.

Another interesting fact from the report is that captive formation is increasingly moving onshore in the U.S. or European Union. The report found that from 1991 to 2000, 65% of the captives formed were domiciled in offshore locations including Bermuda, Cayman Islands, Guernsey, and Isle of Man, while 35% stayed onshore. Over the last decade; 52% of the captives formed from 2001 to 2011 were established onshore, compared to 48% offshore.

Companies tend to turn to captives and alternative risk transfer vehicles for difficult to place or expensive to re/insure risks. The growing interest in captives shows an increasing understanding of the spectrum of risk transfer solutions. If/when the insurance-linked securities market (including catastrophe bonds and industry loss warranties or derivatives) matures sufficiently to make issuance cheaper and to encompass more lines of business, we’d hope to see these instruments enter the consideration set of corporations looking to retain, place or transfer their difficult or costly to place risks.