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Captive Insurance Companies: Potential Solution to Elevated Cyber and Directors & Officers Insurance Rates

DBRS Morningstar released a commentary titled "Captive Insurance Companies: Potential Solution to Elevated Cyber and Directors & Officers Insurance Rates," which discusses renewed interest in establishing captive insurance companies (captives) as an alternative, and potentially more affordable, form of insurance risk transfer to meet organizations' insurance needs compared with traditional insurance channels.

The commentary highlights the following:

-- Hard insurance market conditions will continue globally in 2023, with insurance rates still increasing for most lines, especially for cyber insurance. Government involvement is creating an enabling environment for captives to thrive, creating more capacity.

-- Cyber insurance rates have experienced rapid and consistent increases in recent years. In response to the increasing cyber insurance losses, insurance carriers have implemented more exclusions and reduced insurance coverage limits to mitigate their exposures.

-- Companies looking to buy directors and officers insurance are starting to get some relief, as the pace of rate increases has declined significantly from the highs experienced in 2020 when double-digit increases were the norm.

"Captives are here to stay and will continue to provide much-needed capacity as the traditional carriers reduce coverage limits, increase exclusions, or increase pricing, especially for cyber insurance, where pricing remains significantly elevated. With cyber insurance, risk exposures will become more expansive as the world continues to move toward increased digitization and connectivity," said Victor Adesanya, Vice President, Insurance. "We expect that captives will continue to be an important risk transfer solution for companies going forward. However, the pace of growth may depend on how the regulatory environment around the set-up and use of captives evolves in the future. There are also risks to owning captives that a potential sponsor should consider before setting up these specialized risk transfer alternatives."