Captives Writing Third-Party Risks on the Rise

Coverage for third-party risks in Marsh-managed captives continued to increase in 2019, with total premiums up by $1.2 billion, according to our annual Captive Landscape report.

Although most organizations continue to form captives primarily to fund their self-insured risks, a growing number see advantages in writing third-party risks. In 2019, 18% of Marsh-managed captives wrote third-party property and casualty coverages, including:

• Agency captives for managing general agents (MGAs) and managing general underwriters (MGUs). There has been significant interest in — and formation of — insurtech MGAs/MGUs. These typically see value in forming a captive to allow for assumption of risk, expanded underwriting income, and, in many cases, the ability to work with fronting carriers that cannot or do not want to assume all of the risk.
• Extended warranties. From 2014 to 2019, Marsh-managed captives saw a 28% increase in extended warranties coverage. Such warranties can be used to protect assets ranging from computer equipment to personal electronics to automobiles.
• Independent contractor/customer risks. In the same five-year period, premium volume in captives for contract vendor coverage increased more than 200%, driven by contract vendor liability protection.
• Affinity risks. Affinity programs typically provide lower-cost coverage and nurture relationships with homogeneous groups of customers. Third-party affinity risks include personal property and liability insurance, credit disability, and travel accident insurance.

In the US, another reason for the growth among captives writing third-party risks relates to taxes. In order for captive activities to qualify as insurance for US federal income tax classification, a captive owner must show risk diversification. In 2019, 46% of Marsh-managed US captives used third-party risk as their primary method of risk diversification.

Globally, captive regulators noted an increase last year in the use of captives writing third-party risk, particularly employee benefits, extended warranties, customer coverages, and supply chain, according to a Marsh survey.

By insuring third-party exposures, captives can create a profit center for their parent organizations, diversify the risks they hold, and improve relationships with end customers. In turn, vendors and customers gain access to lower-cost coverages and can build better relationships with captive parents.