One of the benefits of a captive and something that can make them an attractive proposition for the capital markets, is the fact they offer a ready-made risk pool which is often quite specific in terms of the risks it contains and they can also find access to traditional sources of reinsurance tricky at times.
As a result there has always been an expectation that as captives look to secure reinsurance the capital markets and insurance-linked securities (ILS) techniques would increasingly feature as an efficient risk transfer or funding option for captive owners.
In a recent report, broking giant Marsh explains that this is happening more and more now, as captive owners look for efficient reinsurance alternatives and ILS is often in the frame.
“An increasing number of captives use ILS to access reinsurance,” Marsh explains, saying this is, “Especially where current markets have limited capacity for the type and level of risk involved.”
Of course the other reason captives are looking to the capital markets for reinsurance capacity is that they, just like a traditional insurer, are also keen to add diversification to the sources of capital within their reinsurance panels.
Additionally, the fully-collateralized nature of ILS reinsurance alternatives is also seen as an attractive feature for captives.
Of course many captives have been set up as a way to negate large corporates requirement to access insurance capacity, but there are increasing pressures on the world’s largest corporations to take responsibility for the risks they hold and to utilise more risk transfer.
As that trend continues, which we’re going to see manifest itself more and more in relation to climate and weather exposures, we can expect there to be a growing volume of cessions out of captives, which the ILS market could stand to benefit from.
In fact captives offer a wide range of risks that ILS markets may find of interest. In some cases captives can also offer a longer-tailed risk which has already been seasoned over a number of years, which can make them palatable to a smaller segment of the ILS investor community that has begun to look at casualty exposures.
Other classes of business, such as energy risks, are also often found in captives and could be appealing to some ILS markets.
As corporates are urged and regulated to take greater responsibility for the risks within their business, particularly in terms of climate related risks, the use of risk transfer is likely to rise and those with captives could find funding or partially funding them with the help of ILS investors an attractive and efficient way to demonstrate that they are taking responsibility for their risks.
The use of special purpose vehicles (SPV’s) by captive owners is also increasing and we understand that these structures can offer an even easier route to capital for those bearing risk.
How these trends develop over time will depend greatly on regulation and the focus on corporates taking responsibility for their risks.
If the world continues to seek to push corporates to ensure their risks are more fully financed, the capital markets and ILS will stand ready to provide the fully-collateralized capacity required to support this goal.
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