Captive insurance: why more than 15 housing associations are exploring the approach

According to Mr Gibbs, one of the main potential benefits of a captive is to capture underwriting profits for the captive owner, rather than those going to an insurer, and it can be used for several applications. But the main stumbling block is the cost of catastrophe cover, and in many cases this makes the project unviable, he says.

 

Furthermore, there are administrative costs involved, although shared across cells, and if the organisation suffers a major loss in the first couple of years before it has built up some reserves in the captive, then that puts a lot of pressure on future years’ capitalisation and on the reinsurance.

 

Both self-insurance and captive insurance will leave a “significant chunk” of risk on the organisation’s own account, Mr Gibbs adds, and beyond that an insurer or reinsurer is there to step in and protect against catastrophe exposure.

 

Mr Gibbs says that, to use captive insurance rather than self-insurance, you would have to have “a particular set of circumstances where the cost of running your protected cell and buying the reinsurance for it and all the rest of it were less than a similar arrangement in the conventional market”.

 

Moving to captive insurance

 

At the time of writing, at least 15 housing associations have asked Gibbs Laidler to carry out a feasibility study on a protected cell captive, Social Housing has learned.

 

In addition, the National Housing Federation (NHF) has been having conversations with lenders and others about captives and the potential for captives in the market.

 

“We’ve also engaged with government, as well as having a conversation with the Financial Conduct Authority last year on all of this,” John Butler, finance policy leader at the NHF, tells Social Housing.

 

“I suppose for a while we were still sort of looking at the potential of captives as a possible solution. But that’s combined with the fact that [the] insurance market has improved slightly this year, and hopefully things are going to improve further in the future.”

 

Sovereign Network Group, which provides more than 84,000 homes across the South of England, is one landlord that is looking at captive insurance.

 

Craig Thornton, integrated risk management and audit director at the association, says: “Captive insurance is an option that remains under consideration for the company as we tender for new insurance arrangements for 2024.

 

“At present, we are absorbing excess increases where appropriate and continuing to invest in a structured and holistic way in our customers’ homes, which we assess will also reduce risk.”

 

Challenges finding insurance

 

Many providers have warned of the challenges they face in finding insurance, with increasing premiums and excesses and fewer insurers in the sector, as previously reported by Social Housing in November.

 

Later in the same month, insurance was mentioned in the English regulator’s Sector Risk Profile for the first time. In the document, the Regulator of Social Housing (RSH) said: “Sourcing insurance is becoming more expensive, with a limited range of insurers for specific risks such as flooding and tower blocks.”

 

The situation remains challenging.

 

Claudette Marcano, chief finance officer at Alliance Homes, says there is a “very slim pool” of insurers out there willing to work with housing associations now.

 

“The scarcity of insurers makes it more difficult, and this is exacerbated by the increased premiums associated with the different areas of insurance that we have, especially in property,” she says.

 

A spokesperson from the insurance sector’s trade body, the Association of British Insurers, tells Social Housing that the group is aware of “some market movement in this sector, but insurance for social housing remains available”.

 

The spokesperson says: “We understand the importance of providing insurance to the social housing sector. Whether to offer cover and at what price is a commercial decision for individual insurers, based on their risk appetite.”

 

Mr Butler says that the NHF’s members faced “more difficulty” getting insurance last March, but that this has improved “a little bit”, with this year being “less problematic”.

 

He puts this down to housing associations becoming more aware of what is required by insurers and providing more information to them, as well as the body’s ongoing work with PIB Insurance Brokers to bring more insurers into the sector, which has resulted in one new entrant.

 

“It’s not as good as it was, say four or five years ago, because there are fewer insurers in the market,” Mr Butler says. “But all housing associations that we know of have got insurance for this year, so they aren’t actually short yet.”

 

Is captive insurance a possible solution for the sector?

 

When faced with these challenges, housing associations have been encouraged to look at all their insurance options, including captive insurance.

 

Mr Gibbs says that captive insurance could be one potential solution to the sector’s challenge of finding more affordable insurance.

 

“Most housing associations are looking at captives in relation to their main property risks because the cost of that class of insurance has increased very significantly over the past couple of years and they want to find a way to save money,” Mr Gibbs says.

 

“Captives may be one solution, but cost savings are not necessarily the main reason to do it. In the current market, taking large deductibles could be a more effective route for many associations because they save all the costs of running the captive.”

 

Mr Gibbs says that, as building costs arise as the size of the housing association increases and the sums of money involved become greater and greater, then it does become feasible.

 

He adds: “But at the moment it is really difficult to find a model that is effective, certainly for new entrants into the market, and it would require a change in appetite from insurers and reinsurers so that insuring the catastrophe element of the risk becomes considerably lower.”

No ‘one size fits all’

 

On the question of the feasibility of setting up a captive cell at this time, this would depend on several factors, such as degree of exposure, the cost of risk and insurance premiums, Mr Gibbs says. There is no ‘one size fits all’, so a feasibility study would be required for each individual housing association looking at setting up a captive cell.

 

He adds that associations should look at increasing the levels of self-insurance as a way to control premium costs, but the first thing they should do is reduce the total cost of the risk.

 

“The next step is to find the right balance between taking risk yourself and what you then need to insure,” Mr Gibbs says.

 

At the NHF, Mr Butler says that the membership body encourages housing associations to look at all insurance options, including captive insurance. Captive insurance could be a solution for some organisations, he adds, but there are a lot of providers that would find problematic barriers, and more investigations would be needed into the feasibility of captives in the sector because of their risk potential.

 

“I think we’d encourage housing associations to look at it and see if it’s feasible, but I think housing associations should be looking at all the different options related to trying to mitigate a risk,” Mr Butler says. “I wouldn’t recommend any specific course of action at this time.”

 

Providers using captive insurance report positive experiences

 

Igloo Insurance was set up by several associations in 2011 but is now used by only two providers, Clarion and NHG. Bromford used it until 2020.

 

Clarion uses its captive cell for property risk and property liability insurance. It has catastrophe insurance on top of its captive and benefits from a dedicated claims-handling team from the captive.

 

Chief financial officer Mark Hattersley says that the housing association is better protected but still not immune to market forces as it purchases reinsurance, which is a “very challenging” market.

 

Clarion has reported a positive experience with its captive cell over the past 13 years, with premium retention and stable premium levels.

 

Mr Hattersley says that the landlord’s captive insurance has worked well and, even if it was not in place, the provider would be looking at setting it up now.

 

For providers with enough scale, captive insurance is worth exploring, Mr Hattersley says, adding that he is aware of “lots of interest” from other housing associations.

 

“We are speaking to various people, and I know advisors are working for housing associations, looking at the potential viability of setting up captive insurance,” he says.

 

“Housing associations have spoken to us about it; there is definitely lots of interest. It’s worth exploring – more housing associations are asking us about our experience – but you have to go in carefully, with governance and risk parameters to it.

 

“I would always encourage people with scale to explore it. We have no regrets and would definitely look at it now if we didn’t have it.”

 

NHG has also reported a “positive” experience with its captive insurance.

 

“We have a useful working relationship with the captive, and it has been beneficial, so we would like this to continue,” a spokesperson from the provider tells Social Housing.

 

“We have been contacted by one other housing association, asking about our experience with captive insurance, as it was setting up a captive itself. We told them that our experience has been positive, and it has been beneficial for us.

 

“We would suggest that if a housing association is looking into setting up a captive that they consult with their brokers, who can give them appropriate professional advice.”

 

Housing associations that have decided against captive insurance

 

Other associations have decided against using captive insurance in favour of using self-insurance directly or traditional insurance.

 

The Riverside Group currently takes on more risk through higher excesses and takes an annual risk review of certain insurances, but has decided against captive insurance.

 

“At the moment, captive insurance is not part of our immediate plans for the insurance cover,” a spokesperson says. “However, we continue to review the way our organisation structures its insurance cover on a regular basis.” 

 

Bromford left its protected captive cell in Igloo Insurance in 2020 in favour of catastrophe insurance. The 46,000-home landlord now self-insures for property claims at £125,000.

 

Allan Maund, fraud, probity and insurance manager at Bromford, says: “I think the model that we have at the moment works really well for Bromford.

 

“With the size of the business, the amount of customers that we have and our property stock value, it works really well for us.”

 

Keith Petty, director of insurable risk and resilience at L&Q and a member of the G15 insurance group, says that the 105,000-home social landlord has used self-insurance for many years because it is the “most cost-effective way of transferring risk to the insurance market”.

 

This is by retaining risk that is “relatively predictable” that you can better fund yourself, and transferring the catastrophe exposure to an insurer, he says.

 

Mr Petty says L&Q is not presently looking at captive insurance because its self-insurance model is “designed pretty much like a captive”, but it is on the balance sheet rather than off it.

 

He says: “An element of self-insurance is always the best option in our view, but the key is to understand your insurable risk exposures and how best to control/mitigate them. We have looked at various captive solutions in the past and continue to review these regularly, both for L&Q and mutual type arrangements for the wider sector.

 

“The current challenges with insurance in the sector are as much to do with catastrophe exposures (particularly fire) as anything else. A sector captive could find it challenging to secure reinsurance for such exposures if these were pooled into a single vehicle.

 

“That said, the principle of self-insurance/captive arrangements is definitely the right idea, but there are some fundamental issues for the sector to look at first in order to address the insurance challenges we face.”

 

One large unnamed landlord tells Social Housing that it has considered self-insurance, but found that market was also lacking capacity, following conversations with various captive specialists.

 

“Also, with regards to self-insurance it doesn’t work unless you can find a reinsurer which will pick up the catastrophe layer and there is virtually no capacity for that,” the provider says.

 

At Alliance Homes, Ms Marcano says that the provider is embarking on exploratory conversations looking for solutions to mitigate against the risk of a lack of insurers and increasing costs. “There is no proposed change with the talks, it is just exploratory at this stage,” she adds.

 

However, she says Alliance Homes is not looking at captive insurance because of its size, with 7,000 homes, and the projected costs involved. “We’re not a huge organisation; we’re not in that position really to start talking about captive cell,” she says.

 

Elsewhere, Longhurst Group, which manages more than 24,000 homes across the Midlands and the East of England, says it is not looking at either captive insurance or self-insurance.

 

Rob Griffiths, deputy chief executive and chief financial officer at the landlord, tells Social Housing: “We review the level of insurance excess each year, but will not be moving to a self-insurance model.

 

“The self-insurance model could present some challenges with lenders’ requirements for insurance to be in place. The captive insurance idea could work for some RPs, but this has been looked at before and didn’t get enough interest. One of the key challenges I’d envisage is around the different risk profiles of members within a captive model.”