Future of Alternative Risk

Editor’s Note: This is the second edition in a three-part series for Crane Hot Line, which showcases that the growth of captive insurance is projected to accelerate even further in 2025, driven by companies’ needs to better address increasingly difficult conditions with traditional insurance markets, in addition to growing risk management challenges to adapt to with constantly emerging risks for business owners according to Captive.com. Read part 1 here.

Industry experts at the International Risk Management Institute (IRMI), predict a continued expansion in the application of captives in 2025, reflecting their versatility in managing diverse exposures.

Furthermore, artificial intelligence (AI) is expected to play an increasingly transformative role in the captive landscape, enhancing data analysis, supporting strategic decision-making and improving operational safety according to risk management experts at IRMI.

Additionally, Steve Bauman, head of global programs and captive practice North America at AXA XL, shared his enthusiasm for the expanding role of captives, stating, “For 2025 and beyond, the increasing maturity and strengthening of captive insurance companies opens increased opportunities for captives to play a bigger and broader role in risk management. I can’t help but be excited about the partnerships that will be needed in corporate risk management to support the future growth of AI and autonomous mobility, and the future of captives is exciting, not only for large corporations but also for many smaller companies that can pursue the captive experience via group, agency or cell captives and embrace risk management resiliency.”

Captive Industry Leadership Outlook

According to the Captive Insurance Companies Association, (CICA) President: Dan Towle: “The captive industry growth will remain strong through 2025, even with a softening insurance market in some lines of coverage. Companies utilizing captives are seeing the long-term benefits in both hard and soft markets and will not be leaving the market anytime soon. The expansion of existing captives and new captive formations will fuel significant premium volume growth, and this will be the year the United Kingdom decides whether it will become a direct participant in the captive insurance industry. If the [United Kingdom] becomes a captive insurance domicile, this could potentially mark a new era in captive development and perhaps be the most significant insurance/risk management news of 2025.”

Captives are used by the vast majority of Fortune 500 companies to finance their own risk. In fact, as referenced in the previous article, and noted by Captive.com, there are approximately 7,000 captive insurance companies domiciled in more than 70 regulatory jurisdictions worldwide. These captive insurers are set up to insure the risks of its owners as an integral part of risk management programs to contain the total cost of risk. Specifically, a captive insurer is an insurance company that is wholly owned and controlled by its insured members; its primary purpose is to insure the risks of its members, and these insureds benefit from the captive insurers underwriting profit, investment income, tax benefits and unbundled risk services (that they have a say in building).

When a crane owner finds himself in a hard (traditional) insurance market, the business is faced with a continued increase in premiums year over year, often resulting in larger retentions affecting the business’s total cost of risk. This represents riding the traditional insurance market cycles as status quo, as opposed to taking control of your own destiny with alternative risk financing through your participation in evaluating captive insurance options with your trusted insurance broker/producers. There are many additional benefits with alternative risk financing (captive plans) from a financial and operational standpoint that warrant consideration as opposed to staying with the status quo year over year.

Strategic ‘Xs’ and ‘Os’

In your crane business, you set goals and have expectations for how things should run daily. With an alternative risk financing (captive) model, it is the same situation: you and your administration team set goals in forming and administering the captive insurance functions. These functions include certain fundamental operating elements including: regulatory compliance/claims procedures/financial reporting/shareholder statement reviews/outsource relations with risk service providers/reinsurance, fronting market etc.

Overseeing a captive is comparable to managing a football team where the goal is to build a playbook and field the best team possible to achieve success. In this analogy, the captive program administrator plays the quarterback position in conjunction with your trusted agent/broker, and their first job is to recruit a seasoned, proven captive manager. The captive manager is responsible for ensuring all technical quality controls are adhered to. The playbook for the captive manager incorporates a turnkey approach, so you (as captive customer) can focus your attention on growing your primary business.

Here’s a five-step primer as an overview for setting up a captive:

1. Determine the Likely Captive Structure: Single parent/association/risk retention group/agency/rent-a-captive/protected cell.
2. Conduct a Captive Feasibility Study: A captive feasibility study is undertaken to determine whether a contemplated risk financing program is feasible for a particular organization/or group via detailed financial forecasting and extensive account operational risk assessments.
3. Interview and Retain a Captive Manager: Focus on expertise in actuarial, regulatory, domiciliary, investment, tax, reputation and capacity (time to do the job right).
4. Select a Captive Domicile: With 70-plus captive domiciles available worldwide, key elements for consideration of domicile (as regulator) should include political stability, access, support services and cost.
5. Preparation and Submission of a Captive Application: Upon determination of a captive structure, feasibility study, choosing captive manager and selecting a domicile, your application should take 60 to 90 days to complete the process.

Captive Feasibility Study

As a crucial extension of the playbook referenced earlier, the captive feasibility study is a top priority element in alternative risk financing. Your study provides an independent assessment as a detailed blueprint for successful development. This process involves more than just a surface-level review; it’s a deep dive into the crane customer’s risk profile, historical data and financial structure to ensure the most effective and efficient use of captive features in alternative risk financing decisions.

The data points required for conducting a holistic and detailed captive feasibility study include obtaining current policy details and a five-year minimum historical exposure data for each line of business with associated claim history details for each corresponding year of exposure data.

Additionally, establishing baseline metrics that include internal rate of return with tax rates at federal and state levels can be crucial considerations in your study. Captive program developers having access to organizational structure details with associated tax environments, growth potential and acquisition plans that will provide a true state of risk profile of the crane company to establish proper alternative risk financing structures that reflects both current and future realities for your captive plans.

• The captive industry has grown in influence, scope and international recognition in recent years. A formal captive feasibility study enables crane organizations to recognize the financial, operational and risk management factors occurring through the feasibility study, as compared to simply maintaining the status quo in traditional insurance with year-over-year coverage and cost challenges.
• An agile captive manager brings knowledgeable insights about captive industry changes and developments surrounding federal and state laws for inclusion in your study.
• The feasibility study is used to design a risk mitigation plan of action to answer important questions surrounding your policies and coverages.
• The diagram above highlights common elements of a captive feasibility study.
  

Conclusion

Identifying the true total cost of risk coupled with recognizing industry capabilities to mitigate crane risk factors can be achieved through alternative risk financing methods. Focusing on continual risk awareness via the unbundled (captive) environment will measurably reduce crane risk. These two elements are key drivers of the changed mindsets that are evidenced by growth in alternative risk financing around the world.

A true risk awakening is occurring, and the transformation to an action-oriented crane risk culture will save lives and contain litigation in our crane operating workplaces. These two risk improvement dynamics will favorably impact our crane marketplace for years to come. Collectively, we can achieve continual crane risk culture improvement via common-sense, de-risking efforts, that focus on a “hearts and minds approach in daily crane risk awareness,” as an adjunct feature of your alternative risk financing journey.