Growth Opportunities in the Post-Pandemic Era
2020 may have been one of the most challenging years in recent memory, but it was incredibly successful for captive insurance companies. 2021 is a year that has the potential to be even better. It is an excellent time for business owners to evaluate the captive insurance structure and capitalize on the opportunities. This is not just my predictions; I went out to a few of the captive insurance regulators globally to get their feelings and predictions for 2021. In addition, I surveyed many of our captive insurance clients for their predictions on how they think they may change their captive insurance companies in the coming year to manage the changing risk of their businesses.
What is a Captive Insurance Company?
A captive insurance company is a closely held insurance corporation whose purpose is to underwrite property, casualty, liability, and medical stop-loss insurance for the parent company and any subsidiaries. While other additional functions exist, these organizations’ primary goal is to manage enterprise risk. These closely held insurance companies provide uniquely designed solutions to assist the parent company and any subsidiaries in covering the risk for the entire enterprise and mitigating the risk in any business.
How Does a Captive Insurance Company Work?
The easiest way to understand captive insurance is to examine its structure at the most basic level. A company starts a captive insurance company as a separate, stand-alone brother–sister or wholly owned subsidiary. The captive insurance company then undergoes the necessary captive insurance law regulations and can operate as a licensed insurer.
The parent company must identify the subsidiaries' risk that the captive insurance company needs to underwrite. TCaptive insurance companies offer risk management services, write policies, set premiums, and accept payments. They primarily function as risk management and financial management tools.
Emerging Opportunities
Now that I’ve established a basic understanding of captive insurance companies let’s examine what global regulators expect to see in the coming year.
Cyber Insurance
The COVID-19 pandemic has changed the business world as we know it. Hiring remote workers is becoming increasingly common as more organizations move towards online work. Organizations are also using cloud storage services more than ever before. That is why captive insurance industries are seeing a much higher demand for cyber insurance. By providing private insurance solutions that address cyber insurance, captive insurance will be in increased demand in 2021.
Employee Benefits
Right after the increase in cyber insurance, employee benefits are the second aspect that holds a lot of potential for captive insurance companies in 2021. As employees are working remotely, the rise of COVID and increasing medical expenses has caused the price of medical insurance to go through the roof. Organizations seek captive insurance companies to provide sophisticated risk management advice and solutions.
Environmental Liability
The impact of climate change is being seen worldwide, and more governments are looking to make dynamic policy changes to combat environmental deterioration. At the same time, that might not impact how ecological liability insurance functions; it certainly does affect organizations' premiums. As a result, businesses turn to captive insurance companies to find the ideal enterprise risk management solution.
2020 Was a Golden Year for the Captive Insurance Industry
2020 was exceptionally useful and profitable for captive insurance companies and their owners. As mentioned above, we also saw an increase in the formation and funding of existing captive insurance companies specifically to cover cyber insurance, group medical benefits, and environmental liability solutions. We had a marked increase in companies holding employee benefits inside their captive insurance companies. Regulations expect that this level of demand from these new sources will only increase in 2021. The future looks bright for captive insurance companies that can capitalize on these areas.
What Are Potential Gaps That Captive Insurance Companies Can Capitalize On?
One of the main issues that arose due to the COVID-19 pandemic is that many organizations had to alter their production methods completely. As a result, to ensure that they can retain their customers, companies are looking to use captive insurance to provide extended warranties. These warranties can entice their customers and make them comfortable with products that may have had to change due to available components or manufacturing methods. Additionally, another area that will prove to be lucrative in the coming year is supply chain interruption insurance. The pandemic has seen increased interruption in the supply chain of businesses globally. As a result, organizations are using their captive insurance companies or forming new captive insurance companies to insure against unexpected supply chain interruptions.
There’s no denying that the pandemic severely impacted the global economy in 2020. However, the captive insurance industry thrived and hopes to repeat this success in 2021.
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