Captive insurance companies, like traditional insurance carriers, keep a watchful eye on present and emerging risks that can threaten the adequacy of their legacy reserves. In recent months, one particular emerging risk has been gaining significant attention: inflation.
Beyond economic inflation, medical inflation has been a significant underlying issue. US health expenditures are anticipated to grow by 5.4% annually in the upcoming years, reaching an expected USD 6.8 trillion by 2028.
In their article, Inflation risk. Is it here to stay? in the Cayman Focus 2022 issue of Captive International, Guy Carpenter’s Jesse Sommer, Managing Director, and Margaret McGuire, Assistant Vice President, Treaty Broking, break down the effects of inflation and the various strategies captive managers can follow.
The strategies include:
- Some captive managers take a passive approach: expecting that current inflationary trends are transitory in nature, and will have minimal impact on their long-term strategy.
- Other captive managers take a more active role managing legacy reserves to hedge against inflation risk and other adverse developments such as increasing litigation risk.
In these instances, companies have two options to consider:
- Internally manage the claims by drawing resources from other areas to fund the increase in required reserves, or
- Pursue third-party legacy liability solutions to mitigate or eliminate future adverse development
Legacy solutions can include loss portfolio transfers, adverse development covers and novations. The captive’s risk appetite and underlying structure are key factors in selecting the legacy solution that is most appropriate.