Captives can show their value in a hard market, says CRE’s Captives: Next Generation report

Risk managers believe the hardening market is a time for captives to really show their value, according to Commercial Risk Europe’s Captives Report 2020 – Captives: Next Generation.

“When the market is hardening, this is a signal that risk managers can use to better sell the use of captives in their setup,” said Francoise Carli, Zakubo Consulting, and former vice-president, insurance, at Sanofi. “I have seen a couple of companies that I worked with struggle in the last few years to increase the captive’s role in the company because the market had capacity and appetite for new risks, but this is not true anymore. So, putting new programmes in their captive in order to show insurers that they have trust in their risks and in the way they manage those risks and support their business, is a fantastic opportunity for risk managers when there is a hardening market.”

She added: “The hardening market is a fantastic opportunity, not only for risk managers without captives but also for those that have captives that have not been a significant tool yet.”

The hard market is a huge problem for organisations and will lead them to not only write more risk through their captive, but potentially change their attitude to insurance generally, according to Steve Tunstall, general secretary of the Pan-Asia Risk and Insurance Management Association (Parima), and director of Tunstall Associates. “Certain markets seem to have essentially taken this opportunity to punish risk managers. There’s been a soft market for a long time – that’s been the market’s choice. As I’ve said at several conferences, I see some of the extreme examples of hardening as revenge pricing from certain elements of the insurance market at the moment. And that’s not only a problem in terms of people putting more risk in their captive, but can also change corporate attitudes to the whole process of buying third-party insurance,” he said.

There has been a lot of discussion about ‘closing the gap’ in terms of the risks faced by organisations and the insurance cover that is offered by the market, or the gap between primary and excess layers.

Daniele Zucchi, managing director of Sigurd Ruck, and chairman of the Swiss Insurance and Reinsurance Captives Association, said Sigurd Ruck has experienced this directly.

“We at Sigurd Ruck have some first-hand examples of this ‘closing the gap’. One example is the need of our group to have in place professional indemnity insurance that is linked to the fact that Saipem group sometimes acts as an engineering company while doing some construction and engineering works for the oil and gas business. Where there are projects financed through banks or public financing institutions, it is often a request in the contract that our parent company has professional indemnity insurance – a line of business that not everyone has available. The captive in this case was useful in closing the gap between the risk management requirement and the insurance market. The insurance market didn’t want to offer any coverage below a retention of €10m. So, we put the captive in that first layer and are able to provide certification to the client that the coverage is in place,” he said.

There is also the scope to become more creative with your captive, though this may depend on its maturity. Kelvin Wu, treasurer at Parima, and group assistant general manager, risk management and insurance at International SOS, said: “From a risk manager perspective, if you do not already have a captive or it is something new to you or your organisation, the likelihood is that your initial steps will involve sticking to something perhaps more traditional, more easily explained and understood. And the hardening market will make it easier to show the financial value of putting such an arrangement in place. But if you already have the benefit of having a captive, there is more room for you to get creative.”

Ultimately, a captive should be a strategic cornerstone of an organisation’s risk financing strategy regardless of whether it is a hard or soft market, said Andrew Bradley, retired former head of group risk services at Nestlé. “Hopefully, people would take a long-term view and not go in and out of the marketplace, but that will depend on the philosophy of the company that you work for,” he said. “You should always align the captive’s objectives to the main group’s objectives – you have to make a link between the two, otherwise you are going to have a very difficult time trying to sell the captive’s value to your management.

Ms Carli concluded: “If the risk manager really wants to run a captive, they must dedicate time to it. Because it takes time, capabilities and competencies.”

Commercial Risk Europe’s Captives Report 2020 – Captives: Next Generation can be downloaded here.