Buyers turn to retentions and 
captives to boost transfer strategy

With capacity falling and prices surging, Portuguese and Spanish companies have had to increasingly retain more risk, either by choice or because of insurer demands. It is therefore hardly surprising that many are looking at the possibility of using alternative self-insurance tools, such as captives, to optimise their transfer strategies.

“We have been increasing our retention level for quite some time. This year we have once again taken measures in this direction. Retention is turning into a regular resource for companies to absorb the hard market impact,” said Jorge Neto, insurance manager at retail group Jeronimo Martins.

Higher retentions assuage the fears of insurers and obtain better terms and conditions from their policies. But they bring their own set of challenges, not least because companies are adding risk exposures to their balance sheet. Therefore, Mr Neto stressed that companies must boost their risk management capabilities before thinking of retaining more risks.

“To increase retention levels without enhancing the underlying risk management mechanism is a reckless thing to do. You are bringing too much risk into the organisation, and you cannot manage it the same way you did before. If retention goes up, risk management processes and policies must be strengthened as well,” he said.

That is where instruments such as captives come to the fore, and Jeronimo Martins is right now studying the possibility of setting up its own self-insurance vehicle. “We have been discussing with our brokers alternatives to manage higher retentions. It is likely that we will end up using a specialised retention vehicle, like a captive or a protected cell company. It has not been set up yet but we are working arduously on a solution,” Mr Neto said. But he added that the usefulness of a captive depends on the characteristics of its risk owner and its business activities.

“Retail is a particular market. We have high levels of aggregate capital, but exposures are very spread. In Poland alone, we have more than 3,000 supermarkets,” he said. “The aggregate capital of those 3,000 units is very high but it is scattered around the country. That is why we have to deeply study the type of retentions we put in place. Our main focus isn’t severity in an aggregate point of view, it is more the frequency of medium claims.”

Daniel San Millán, president of Spanish risk management association Igrea and corporate risk manager at construction group Ferrovial, also sees captives as a powerful tool to navigate periods of market turbulence.

“As a consequence of the hard market, underwriters are making us retain much more risk. It is no longer a matter of using captives to find the optimal risk/retention ratio. We are being forced to retain more risk. Those who do not have a captive tend to suffer more, as the retention goes directly into their businesses, which are already sometimes struggling,” he said. 

As a result of current market conditions, Ferrovial is using its captive more intensely than before, not only to obtain better terms and conditions, but also to transfer risks that jittery insurers are reluctant to touch. “There are risks for which the market is so hard that it is worth retaining them. For example, all financial lines. Although they face some compliance restrictions, it is possible to retain D&O risks linked to the organisation. We are also using our captive to retain risks in PI, property, liability and construction. In all lines, we have had to retain much higher volumes,” he said. 

And it looks like other companies are likely to follow Ferrovial’s example.

“For some years we have been studying the possibility of setting up a captive company. We are looking at it at this very moment,” said David González, chief insurance officer at construction group Sacyr. “There is no doubt that the current situation will last some time and, in the future, it will be necessary to find a better balance between risk transfer and risk retention. In this, the captive company plays a fundamental role.”

An initiative is about to be launched in Spain by the country’s two risk management associations, Agers and Igrea, to boost captives and other alternative risk financing tools.  

Lourdes Freiria, director of risks and insurance at construction firm Grupo San José, is keen to take an active part in the discussions, not least because the possibility of creating a captive is being discussed by her own company today.