Demand for captive solutions is growing, says Artex

Demand for captive insurance is likely to grow as property insurance buyers continue to face problems with capacity and pricing in the conventional insurance markets. 

The insurance-linked securities market is also likely to see an increase in capacity in the near future as the sector becomes more stable, according to a report from alternative risk transfer specialist Artex. 

Artex, a leading captive insurance company manager and ILS specialist, said challenges experienced by many US and European insurance buyers last year was continuing to drive demand for alternative risk transfer solutions, including various forms of captive insurers. 

“In the US, a number of mid-sized corporate clients who had previously placed their insurance with a single carrier  were faced with non-renewal as carriers reassessed their exposure to severe convective storms,” Artex said. “As result, many were forced into the excess and surplus lines markets and there was pressure on retail brokers to create new programmes, often at short notice.”

It added: “Having had a year to ruminate on the challenges presented by a  severely constrained property catastrophe market, insurance buyers have had time explore the ART options available to them. As such the demand for captive insurance remains high.” 

Although more capacity was returning to the commercial market and pricing was easing, interest in ART solutions continued, Artex said, adding: “In some of the more distressed classes of business, such as public sector institutions, agriculture and transportation,  captive and parametric solutions enable clients to secure coverage where it might not otherwise by available.”

Artex said European clients were showing increased interest in establishing onshore captives, while Spain, Italy and the UK were moving to introduce captive regimes in the wake of France’s successful introduction of a new regulatory framework in 2023. 

“Another trend of note is the growth interest in mutual insurance, where solutions are not readily available within the commercial insurance market,” Artex said. “It follows the successful incorporation of a cyber mutual in Belgium in 2022 by a  group of European organisations. 

“The global mutual and cooperative sector’s share of the total insurance market rose to an eight-year high of 26.3% in 2022, according to data from industry body ICMIF.” 

Artex also said the reinsurance and ILS markets are becoming more structured and balanced. 

“Investors continue to be attracted to the market due to its strong fundamentals,” the report said. “As a diversifying asset class, ILS and collateralised reinsurance offer liquidity and robust risk-adjusted returns. 

“After a strong performance in 2023, Artex is witnessing a small uptick in interest from investors, including hedge funds and pension funds.” 

Artex said established long-term ILS investors continue to actively engage with the sector while “some new capital” is entering the market. 

Artex said the catastrophe bond market opened the first quarter with “remarkable vigour”, with new issuance jumping 30% in the first quarter to $4.23 billion, only the second time in history it had exceeded $4 billion. 

It said investors were willing to look past concerned about trapped collateral and loss creep. 

“As investors recalibrate their strategies, they are drawn to opportunities that offer exposure to high-value perils, recognising the potential for attractive risk-adjusted returns in these specialised segments of the market,” it said.  

The report noted that current forecasts for an above average Atlantic hurricane season intensified cedants’ focus on risk mitigation solutions within the ILS market. 

“Given the anticipation of a potentially active season, hedging practices are gaining importance as a proactive measure to manage exposure to potential losses, and we are seeing a lot of interest in industry loss warranties.”  

Artex said the outcome of the hurricane season will inevitably influence pricing trends and investor behaviour if the market was affected by a major loss. 

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