Captives and contract certainty – two key aspects when it comes to global insurance programmes

As the insurance market started to harden, many insurance buyers began to consider a captive as one way to mitigate the rising costs and tensions in their programmes. Liz Booth reports on ways to ensure contract certainty throughout the programme

Captives as reinsurance companies certainly play a central role in a global programme. However, their use depends on the strategic risk management and risk financing priorities of the parent company.

That is the view of Paul Wöhrmann, head of captive services EMEA, APAC & LATAM, commercial insurance, Zurich Insurance Group.

He explained: “Large international companies manage and finance their group retention centrally, while risks from the group’s subsidiaries are managed locally. Traditional approaches such as the introduction of deductibles with the ‘lead carrier’ attached to the master policy are only pursued by a few businesses.

“Captives, which reinsure the risk exposure of the parent company and fellow subsidiaries, have become very popular risk management investments in this challenging market environment, as they offer the entire range of proportional and non-proportional reinsurance.”

Looking back, he said: “We have experienced two related forces driving the emergence of captives. Firstly, the scarcity of insurance capacity forced corporations, which were desperately seeking coverage, to find and use alternative routes. In many cases, businesses were not able to transfer risks to the market and therefore used captives to manage retained risks efficiently.

“Secondly, corporations that invested heavily in risk management measures and, in return, had good loss experiences, found that over time, premium payments far exceeded claims payments.”

He said the parent company of a captive can effectively get a share of the underwriting profits of its insured business. “As it participates directly in its loss experience, it has a strong incentive to further improve risk management and enhance risk awareness as well as loss prevention and control. Moreover, underwriting profits and investment returns traditionally reserved to the insurance industry can be retained within the group and improve its cashflow,” Mr Wöhrmann added.

This is obviously the goal for any captive operation but, as many have found out, a captive is not necessarily a quick-fix solution and is something that needs to be deeply assessed before any moves are made.

No wonder then that risk managers and carriers across Europe are reporting a surge in feasibility studies as companies explore their options.

Mr Wöhrmann said there are plenty of reasons why a captive is a good idea: “We have also observed that a captive self-retention within the primary layer of an international property programme provides financial incentives to reduce future frequency claims through active risk management and the systematic identification, assessment and improvement of risks.”

Added to that, he believes access to the reinsurance markets through a captive can be an interesting opportunity for captive owners to navigate the hardening market.

Overall, he said his experience has taught him that, in the context of international programmes, captive owners use their reinsurance captives mostly to optimise insurance and reinsurance structures.

They will also look to benefit from arbitrage opportunities in the markets (pricing, coverage and capacity) as well as looking to strengthen the core business of the captive owner, develop new solutions for new risks and also to merge two worlds (life and non-life) into one reinsurance captive.

All of these, he said, will be factored into the final decision-making.

Another key consideration for risk managers is contract certainty and having confidence that the policy will behave in the way they expect. However, global programmes are complex and achieving that can be a challenge.

Patrick Eder, international programmes underwriting liability, commercial insurance, Zurich Insurance Group, used the example of international liability insurance. He said: “Writing this business by ways of international programmes across the globe requires high technical and insurance expertise from anyone involved in the process.”

Since 2016, Zurich has implemented a fully automated contract certainty process to deliver high-quality local policies to customers, and to avoid potential leakage caused by mistakes like missing exclusions.

“At the beginning of the year, underwriting units identify a certain number of policies they want to put through this review process. The policies are marked in the international programme system and before the receiving country can issue the local policy, the policy draft has to be uploaded into the Contract Certainty Cockpit (C3).

“Before the policy gets confirmed in the system, the underwriter receives an email with a link to review the policy in the C3. Once the review has been done by the underwriter, the policy can be issued.”

Mr Eder said the company has found that “since this process has been in place and with the experience we have gained, we can see an improvement on the contract certainty ratios, in fact they are now very strong and solid”.

“The implemented process has therefore improved the quality of the local policies,” he concluded.

Commercial Risk and Global Risk Manager are hosting the Global Programmes Conference on 14-16 September 2021. This year’s conference will be hosted over three days and will look at the challenges in the insurance market, examine possible solutions and highlight the benefits of programmes in providing global coverage for a multinational. Click here to secure your seat at the event.