Captive market growing and taking on cyber, says AXA XL

The captive market seems to be still growing, both in terms of new captives and existing captives writing more business, driven by the hard market and in particular tough terms and conditions and exclusions. It is an interesting time for captives, not just in terms of providing traditional coverage where the market is tough, but also for newer challenging markets such as cyber. And captives are increasingly being talked about in relation to ESG and other alternative solutions such as parametric covers. At this years’s Ferma Forum, Global Risk Manager talked to Marine Charbonnier, global programmes and captives regional director, Europe at AXA XL. She confirmed that the captive market is continuing to grow: “We have existing captives that have more reserves so they are more able to support some key challenges the group is facing – it could be for specific guarantees such as product contamination, product recall. And this kind of very strategic development can be interesting for the involvement of the captive as soon as the captive has enough maturity – reserves, capital allocation, etc. For other lines of business on the more traditional layers, of course we are seeing more involvement of captives. And we have new captives also.” Charbonnier said there is much more involvement of captives in cyber, which is a relatively new area for them. Indeed, AXA XL has doubled the number of captive cessions on cyber and there are more and more requests, she said. “For this line it can be on the first layer but also captives on quota share, on the first excess layers due to the lack of capacity in each territory,” she said. She stressed that this tends to be where the captive has built up enough reserves rather than a new captive with new capital. But if the lack of capacity of the cyber market is really something that is problematic because of the need for the coverage, it can be done, she said. “And we have to manage the timeline because when a captive is asked to be involved in cyber, it has to be prepared to act fast because it is usually at the end of the process of the renewal. Because you are looking for the capacity everywhere in the world and just at the end the gap needs to be filled, so the negotiation can be late in the whole process and that can be challenging,” she explained. There are two areas that are increasingly being discussed in relation to captives: ESG and parametric solutions. Charbonnier said the captive is potentially useful to address key messages regarding the ESG strategy of the group: “It can be to have values and attachment points according to what the subsidiary has really done. It can be to drive the ways indemnity will be used, so it will really help the risk manager to address those kind of messages. It will depend on whether the captive is a direct captive or a reinsurance captive; if it is the latter, it will involve the fronting carrier also addressing the strategy according to those criteria.” Another area is the involvement of the captive regarding loss prevention, she noted. “For example, we have some captives that are involved in paying for prevention because it will reduce frequency and potentially the amount of claims. So the captive can be involved to finance part of the prevention. Also in this area, the captive can support the messages of the risk manager.” As for parametric covers, Charbonnier said that with the captive involved, there is more access to different solutions. “It depends on the issue you want to solve with parametric capacity. If you want to solve a lack of capacity for a cat event, at which level do you want to recover? At the parent company level, as a DIC/DIL or on a FINC basis? Or at the local level? If you want to be covered at the local level in a country with a strong regulation and that is not very mature, you will need to have an insurance policy on an indemnity basis, not on the parametric basis. So the captive can be involved as usual, and after the capacity can be based on parametric covers,” she explained. “The captive is a tool and will add many possibilities.” She added: “Actually, we have a few captives with protection based on parametric coverage and the captive has the risk basis on its own – the difference between the loss at the local level and the indemnity the captive would receive. There is potentially a gap, so the captive can take this exposure. Locally, the insured will have the proper indemnity as it would be based on indemnity via the captive, and then the capacity based on the parametric can be different.”

Captive market growing and taking on cyber, says AXA XL

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