Self Insurance

Why Businesses Today Are Turning to Captive Insurance

by Charlie Lenz

States throughout the US are seeing the number of captive formations skyrocket compared to the past. The 2021 year showed significant increases in the world’s largest captive domiciles. The number of Vermont-licensed captives grew by 31 in 2021, the largest net gain (new captives less dissolved captives) in the domicile’s long history.  The table below shows the  10 domiciles with the largest gains over the 2021 year.

Two key trends in the current hard-market cycle are driving up the number of captive formations: (1) demand for cyber insurance; and (2) climate changes that have steadily driven up property premiums.

As times change, more businesses recognize the value of captive ownership. If your company has never considered self-insurance through captive insurance, now may be the time.

Cyber insurance has become a must-have protection for today’s businesses

Cyber insurance continues to be a hot topic in the industry. As malicious actors become more organized and their attacks more sophisticated, companies without cyber insurance are at risk for potentially devastating ransomware ambushes. Large companies and government entities have been bolstering their cybersecurity protections and can afford to pay cybersecurity analysts, an increasingly scarce resource, making it more challenging for hackers to hijack their data. As a result, bad actors are turning to easier targets: schools and universities, small- and medium-sized businesses, municipalities, and other organizations less equipped to mount a strong defense.

Organizations that previously felt they weren’t significant enough to warrant hacker attention are now prime targets.

As cyber premiums rise, more companies are self-insuring

Cyber insurance premiums nearly doubled industrywide in 2021, and the increases have continued through the first quarter of 2022. Organizations waking up to the need for cyber insurance are facing a catch-22 – they know they need it—but it’s costly.

Companies are forming captives or adding captive insurance to their plans to manage the high cost of cyber insurance premiums. But businesses that have never licensed a captive are often unsure where to begin. Speaking to the experienced actuaries at Perr&Knight is a great start. We’re available to answer questions and provide support through the process of obtaining a captive license.

Lack of historical data for cyber insurance

For companies that already have a captive in place and want to add cyber insurance, our actuarial consulting teams can help with this.

When adding coverage to a captive, companies must provide a business plan amendment to captive regulators, including estimated captive premiums. However, because cyber insurance is so new, the availability of historical data creates challenges determining premiums for this coverage.

Again, this is where working with experienced partners like Perr&Knight is advantageous. We have developed proven methods for estimating captive premiums based on decades of actuarial consulting expertise.

High property premiums lead to more captive formations

Property insurance is getting hit from multiple angles.  Climate change is increasing the number of weather-related property claims. Tornadoes, floods, wildfires, and other significant weather incidents are happening with greater frequency and intensity—and in never-before-seen areas. These catastrophic events continue to drive the hard market, resulting in insurance affordability and availability issues for many companies.

Additionally, regions throughout the nation are experiencing a runup in insured property values. If a business hasn’t had an appraisal in a decade, they may suddenly find themselves paying substantially higher premium based on their property’s amended value.

Captive insurance can mitigate the affordability problem, which is why more businesses opt to self-insure with a captive.

A pre-feasibility study provides direction

Conducting a pre-feasibility study with an experienced actuarial consulting partner can help determine whether captive formation makes sense for your organization.

At Perr&Knight, we have developed methodologies to produce accurate pre-feasibility studies that provide insight into whether captive ownership makes sense for your business. A pre-feasibility study is not only a cost-effective means of gathering business intelligence; information contained in the study can serve as the basis for the actuarial feasibility study that captive regulators will require.

As times change, captives are here to stay

As the world shifts around us, companies recognize the potential benefits of captive insurance. If your company is considering captive ownership or is already well down the path of forming a captive, the team at Perr&Knight can answer questions, provide direction, and deliver insight into the best course of action.

Contact the actuarial experts at Perr&Knight to conduct a pre-feasibility study or to discuss captive insurance options for your business.

Are Rising P&C Insurance Premiums Eroding Your Company’s Profits? Take Control with Self-Insurance

by Charlie Lenz

Authors: Charlie Lenz, ACAS, MAAA, Principal & Consulting Actuary, and Les Vernon, FCAS, MAAA, Senior Consulting Actuary
Property and casualty insurance brokers are reporting significant rate increases and reduced capacity, resulting in less favorable coverage terms and often higher deductibles or self-insured retentions being offered. Causes are higher underwriting losses, lower investment returns, and now, the COVID-19 pandemic. This has made finding the coverage a business needs at an affordable price increasingly difficult.
The Commercial Auto Liability line is experiencing increased frequency and severity of claims, producing poor combined ratios. Contributors to the increased frequency of claims are more vehicles on the road and distracted drivers in recent years. A shift to newer vehicles with advanced driving technology has made repairs more expensive.
The General Liability line is experiencing increased severity of claims due to a greater portion of claims being litigated and social inflation, where juries are increasingly calling for greater corporate accountability, and high awards are becoming more acceptable.
The uncertainty surrounding the COVID-19 pandemic and the potential litigation to expand coverage for business interruption retroactively has placed upward pressure on Property rates. In addition, recent hurricane and wildfire activity has forced steep increases in premiums for risks with catastrophe exposure.
Exposure of essential workers to COVID-19 infection combined with mandated coverage expansion in some jurisdictions is threatening to increase costs for workers compensation insurance – one of the few lines of business not yet seeing upward pressure on premium levels. There is also uncertainty regarding potential future litigation of health care providers related to COVID-19, which, in addition to an increased frequency of large claims, is contributing to increased rates in medical professional liability coverage after years of flat rates.
With many more workers shifting to working from home as a result of the COVID-19 pandemic, if only temporarily, businesses are less in control of their computer networks and are more susceptible to phishing and hacking activity. As losses continue to rise, rates are predicted to see double-digit increases.
There are alternatives to suffering through multiple years of increasing insurance premiums and/or coverage reductions. If your organization is experiencing lower claim trends than the industry, self-insurance of some form may be an option worth exploring. Your company can retain more of their own risk via a large deductible policy or participation in a risk retention group. Alternatively, the company can form a captive insurance company (or participate in a group captive) to insure against some exposures for which it currently pays a high premium. Potential advantages are lower costs, insulation from some of the volatility of the insurance cycle and, in the case of a captive insurance company, control over claims administration and direct access to reinsurance markets.
In order to determine if self-insurance is a good option for your organization in this hard market, historical claims experience can be used to perform a retention analysis for a large deductible option and a captive feasibility study for a captive option.

Perr&Knight has a large actuarial consulting team for self-insurance. If your company is looking to reduce your insurance costs and is considering self-insurance, contact us. Our actuaries will use their expertise to help you evaluate the different options available.

Change May Be Brewing for Medical Professional Liability Carriers

by Leslie Vernon

After comparing data from the top 100 nationwide carriers of medical professional liability insurance, upon first glance it appeared that net income declined in 2017. However, after removing carriers that write medical malpractice as less than 50% of their business, a closer inspection of the data revealed that in 2017, net income actually increased slightly. On the surface, this might sound good. However, our experience providing actuarial consulting services to medical professional liability carriers actually makes this steady trajectory raise some alarm bells. These trends could signify a deeper issue: because the results of medical malpractice insurance have been coasting along for so many years, the line could be due for a serious shakeup.

The state of the market

Overall, what we’ve seen over 2017 is a further perpetuation of the profitability of the previous years. Actual premiums have declined, but investment gains have been high, even though underwriting income remains low. More good news is that the rate of incidents of malpractice has been in steady decline for many years. Frequency trend of claims and incidents of medical liability have diminished, thereby helping maintain underwriting profits at present rates. This is a positive trend in the industry. However, there are other less directly-related changes that are important to be aware of.

Evolving medical groups and the rise of self-insurance

One of the challenges facing medical professional liability carriers is the shifting makeup of medical groups. In the past, physicians practiced solo or in relatively small medical groups. Now, many more physicians operate under the umbrella of a hospital or significantly larger healthcare provider. The bottom line is that the market for physicians’ insurers is shrinking. Hospitals and healthcare providers are increasingly forming their own captives and paying their own claims. This overall trend is shifting dollars away from insurance carriers toward alternative risk vehicles.

In a limited market pool, it pays to be proactive

In terms of gaining market share, there are not many more physicians that a carrier can reach. However, you can take steps to increase the attractiveness of your offerings to entice medical groups and single practitioners, including reviewing recent rate filings to compare your rates with the competition. This can present a bit of a challenge since not a lot of companies have changed their rates lately because the line has been so profitable. Carriers are more inclined to file with the state when increasing rates; if things are going well, many carriers are reluctant to lower rates. However, this is where it can pay off to work with an experienced insurance actuarial consulting services partner. For example, at Perr&Knight, we track filings across all jurisdictions, so we can see who is changing their rate filings—and the justification behind it. This intel can help you determine how best to amend your rates to become more competitive.

What’s ahead for the future?

Underwriting income gains have helped support profitability for this line, but these gains have been minimal. Carriers have relied on reserve takedowns to increase underwriting profitability. However, this trend is decelerating. At some point, it will likely swing in the opposite direction as actuaries begin to underestimate reserves on prior years. If (or actually—when) this happens, carriers will need to increase rates.
Because medical professional liability insurance has been such a profitable line for so long, carriers tend to adopt an “if it’s not broken, don’t fix it” attitude. However, this complacency could lead to financial setback down the line if you aren’t keeping one eye trained on the future to make sure you get ahead of the change that may be percolating just beneath the surface of the marketplace.