Crane Hot Line is part of the Catalyst Communications Network publication family.
Editor’s Note: This is the first edition in a three-part series for Crane Hot Line readers to identify the merits of alternative risk financing, as compared with the volatility in traditional property-casualty insurance for today’s business owners in our crane, rigging and specialized transport (CR/ST) marketplace.
Alternative risk financing (also known as captive insurance) is a mature part of the global insurance and reinsurance marketplace. According to industry experts at the industry recognized International Risk Management Institute, the captive industry is evolving rapidly, poised to reach a projected $250 billion global market value by 2028.
This surge among businesses seeking alternative coverage methods and cost reduction, underscores the need for a comprehensive understanding of trends, challenges and opportunities for our CR/ST marketplace to consider alternative risk financing means and methods.
This three-part article series by Crane Hot Line is being provided to accomplish that objective.
As we look ahead in 2025 and beyond, it will be helpful for CR/ST businesses and related industry stakeholders to examine the trends and future trajectory of the captive insurance market to assess the advantages and disadvantages of captive arrangements to determine how our industry members may be able to use them to navigate today’s ever-changing financial landscape of traditional insurance markets.
Business organizations worldwide have been using captives since the 1950s, and it is fair to say that the captive insurance sector has weathered many storms providing direct risk benefits to their owners and participants over the past 75 years.
The primary purpose of a captive insurer is to provide coverage for the risks of its owners, ensuring that the insured parties benefit from the underwriting profits generated by the captive
Captives are being utilized by businesses all across the U.S. and worldwide for a variety of risk management reasons including strategic, financial, operational as well as a result of traditional insurance market condition instabilities.
Captive structures that a company forms commonly involve the company becoming the shareholder of its own insurance company, either directly or indirectly. This alternative risk financing structure provides succinct advantages for participating captive customers working in conjunction with their trusted agent/brokers in developing critical risk mitigation resources via the “unbundled risk service” nature allowable in captive structures including:
Key Elements for Consideration
Captives are often established by firms that are experiencing consistently unacceptable renewal terms from traditional insurance markets. This can often be the result of increasing claims costs in a select industry segment or line of business, or it could simply be as a result of negative market dynamics – with opportunistic traditional insurance markets.
However, any consistent year-over-year renewal pricing increases by traditional insurance markets typically are the result of a growing shortage of reinsurance capacity, based on certain industry segment restrictions or line of business performance outcomes, such as commercial automobile line of business difficulties.
Often, these are market-driven restrictions generated by consistently underperforming lines of business. There are four elements that comprise key considerations for CR/ST owners to consider when evaluating alternative risk financing/captive options including:
Strategic Elements:
Financial Elements:
Operational Elements:
Marketplace Elements:
Advantages and Disadvantages of Captive Insurance
The formation of an insurance captive is complex and requires careful consideration of multiple factors, including tax implications, regulatory environment and operational considerations. Before deciding whether an insurance captive is the ideal solution for your company’s risk management needs, it is important to carefully weigh its advantages and disadvantages.
One of the main advantages of forming an insurance captive is that it can measurably reduce your annual insurance spend. This cost reduction is achieved by self-insuring some of your risk while transferring other risk to third party reinsurers. In addition, you will incur reduced cost when claims are mitigated via your unbundled risk mitigation resources.
Additionally, the captive structure allows participation in investment income that will reduce your overall cost of risk by inherent design embedded in the captive insurance structure.
Insurance captives also offer companies access to more competitive pricing options than traditional insurers while providing greater control over claims-handling processes, and captive plans have potential tax benefits to customers.
On the other hand, there can be drawbacks with captive set up costs, possibly including capitalization requirements. Additionally, formation expenses and regulatory requirement costs for some captive structures can be cost prohibitive, unless you are considering an agency captive structure whereby these are common costs of doing business expenses that are embedded in the agency captive structure.
The Future Is Bright for Captive Expansion
The volatility of the underwriting cycle in traditional insurance markets has been a driving factor for captive growth in the past, and the recent hard market was no exception. The number of captive domiciles continues to expand with both U.S. and Europe onshore captives looking set to thrive in the next few years, while pressures in traditional insurance markets seem set to continue – at least in some lines of business like commercial automobile and trucking.
At the same time, the growing focus on long-term sustainability is opening up opportunities for captives to play even a bigger role.
Much of the recent captive growth has involved U.S. parented captives, and most of that has been onshore in the U.S. Indeed, states have been falling over themselves in the last decade or so to pass captive laws. And, for the first time ever, last year saw Vermont overtake Bermuda and the Cayman Islands to become the world’s largest captive domicile according to business insurance rankings.
Meanwhile, in the U.K., Lloyd’s recently announced its first captive for many years, and the U.K. government is being urged to make it even more attractive to host onshore captives in the country.
At the same time, Italy is also being urged to attract new captives and there is pressure growing in Spain and Germany to add new territories to the existing domiciles, such as Ireland, Sweden and Switzerland.
The future being bright is not just about new captives, as perhaps more importantly, companies are putting more businesses through their captives. Indeed, captive premiums grew again in 2023, driven by both existing and new captives.
Lastly, according to expert Ken MacDonald of R13k Consulting, “history and statistics tell us that captives do not reduce in total numbers in a soft market, or even a prolonged soft market. This is a testament to the totality of the benefits that captives deliver.”
Timeline Considerations
There are multiple facets involved in setting up an alternative risk financing or captive insurance structure that logically requires proper due diligence and serious timing considerations to protect everyone’s business interests.
To ensure the whole process runs as smoothly as possible, the captive industry experts suggest the shortest timeline to establish a captive insurance vehicle is six weeks post a captive feasibility study. Considering the critical nature of the feasibility study component within building a captive program, and that the feasibility study process alone will take four to six weeks, a rational assumption for building a meaningful captive model is three to six months start to finish.
Conclusion
As indicated previously, there is a growing interest today, on a worldwide basis in captive programs considering the volatile traditional insurance market. In fact, with regard to supporting the emergence of captive solutions in our marketplace, we need to recognize one of the leading commercial insurance agent/brokers serving the U.S. CR/ST marketplace, USI Insurance Services, for their recently well prepared and delivered webinar sponsored by the Specialized Carriers and Rigging Association, entitled ”Captive Insurance Programs: Is Your Company Captive Ready?”
USI made a highly insightful and professional presentation on captive insurance and risk management for crane, rigging and specialized transport operators in this webinar. USI is considered a market-leading insurance agent/producer of risk management-based insurance in our marketplace for over the past 30 years. The USI presentation emphasized a key element in captives having the ability to unbundle risk services for the customer/user to tangibly mitigate their risk.
We should recognize Jeff Haynes, Randy Proos and James Stovall for making this important presentation in support of alternative risk financing methods to protect the futures of crane-rigging and specialized transport customers.
This concludes the first edition of this three-part article series. Part two will cover a five-step primer on how to set up a captive structure in your organization, including the different types of alternative risk financing vehicles and the importance for conducting a formal captive feasibility study for your organization in preparation for alternative risk financing.
