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 regulators globally to get their feeling and predictions for 2021. In addition, I surveyed many of our captive clients for their predictions on how they think they may change their captives in the coming year to manage the changing risk of their businesses.
First, 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 there are other additional functions, these organizations' primary goal is to handle enterprise risk management.
These closely held insurance companies provide uniquely designed solutions to assist the parent company and any subsidiaries cover the risk for entire enterprise and mitigate the risk that exists in any business.
How does a captive insurance company work?
The easiest way to understand how captive insurance works is to look at its structure at the most basic level. A company starts a captive insurance company as a separate, stand-alone brother – sister company or a wholly owned subsidiary. The captive then goes through the necessary captive insurance law regulations and can operate as a licensed insurer.
It's the parent company's task to identify the risk of the subsidiaries that the captive insurance needs to underwrite. The captive insurance companies' job is to offer risk management services, write policies, set premiums, and accept the payments. It primarily functions as a risk management and financial management tool.
What innovations are regulators expecting?
Now that I've established a basic understanding of how captive insurance companies, let's look at what the global regulators expect to see in the coming year.
The COVID-19 pandemic has changed the business world as we know it. As more and more organizations move towards online work, hiring remote workers is becoming increasingly common. Organizations are using cloud storage services now 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, captives will be increased demand in 2021.
Right after the increase in cyber insurance, the second aspect that holds a lot of potential for captive insurance companies in 2021 is employee benefits. 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 are looking to captives to provide them with sophisticated risk management advice and provide them with a solution.
One of the quickest ways businesses can get a handle on their rising costs and shrinking benefits is with a captive. Companies need to review the feasibility of putting their benefit program inside a managed self-insured plan and reinsuring the specific and aggregate stop loss coverage through a combination of a captive insurance company and commercial reinsurance.
The impact of climate change is being seen worldwide, and more governments are looking to make dynamic policy changes to combat environmental deterioration.
While that might not impact how the environmental liability insurance functions, it certainly does have an impact on the premium that the organizations have to play. As a result, businesses turn to captive insurance companies to find the most ideal enterprise risk management solution for them.
2020 was a golden year for the captive insurance industry
Last year 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 their employee benefits inside their captives. Regulations expect that this level of demand from these new sources is only going to 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 an increased level of interruption in the supply chain of businesses globally. As a result, organizations are using their captives or forming new captives to insure against unexpected supply chain interruptions.
There's no denying that the pandemic had a severe impact on the global economy in the year 2020. However, the captive insurance industry managed to thrive and looks to repeat the same in 2021.