Captives hold key to emerging risks challenge, says risk manager

Risk managers must make greater use of captives in order cope with a rapidly evolving risk landscape and a reduction in insurance capacity.

That was the view of Laurence Eeckman, vice-president, group risk management at Swedish home appliance manufacturer Electrolux, who was speaking at the annual Risk Forum of Swedish risk management association Swerma.

Eeckman, also a Ferma board member, took part in a panel discussion on the changing needs of risk managers and articulating these to the senior management.

One of the greatest challenges for risk managers is persuading the board to commit funds for managing emerging risks, said Eeckman.

While the mitigation measures and insurance budget for traditional property and casualty risks may be well established, the same cannot be said for the likes of cyber risk. “It can be hard to attract investment for something that is improbable. But you need to push this, because some risks require immediate action,” said Eeckman.

Consequently, Eeckman advised risk managers to focus their efforts on two or three emerging risks that require action now, summarise the mitigation strategy including finance, and focus on the effect and impact of these risks.

“You cannot bring all the risks to the board, so you have to engage with the stakeholders to find out which ones are the most important. You also need to know the velocity of these risks and how soon it will be before they impact the organisation – two years or two weeks?”

Eeckman also advised moving from risk identification to risk management and also looking beyond the insurance market when it comes to meeting the current challenges around risk transfer, at a time when the risk landscape is rapidly and dramatically changing.

“We have to act now because risks are changing but there are a lot of innovative solutions available – parametrics and captives – and risk managers need to do more to make the c-suite aware of these tools,” said Eeckman.

Captives could be especially useful in the current market as a way for companies to absorb more risk on their balance sheet rather than transferring to a costly insurance market, said Eeckman.

Some captives have accumulated a lot of capital and the gap between “the risk appetite of the organisation and the captive is too large and needs to be reduced”.

Consequently, Eeckman believes captives should be used to greater effect by risk managers as they look beyond insurance for their emerging risks.

It was a view shared by brokers at the Swerma event.

According to Aon’s biennial Risk Survey, the six most important emerging, long-tail risks are: cyber, intellectual property, ESG/climate, reputation, supply chain and pandemics.

The key takeaway from the latest survey was the extent of insurability for these risks. Just 13% of the top six emerging risks are covered by insurance. Similarly, the protection gap has got wider as global insurance penetration has reduced from 3% of GDP to just 2% of GDP.

One factor behind this drop in insurability is the increasingly intangible nature of risks. According to the latest research, 85% of the companies within the S&P500 provide intangible assets. In 1975, this figure was just 17%.

Consequently, risk management has to adapt to this change and that means less focus on the frequency and severity of risks, and greater use of scenario analysis and alternative futures, as well as captives.

Captives have been used as a tactical compliment to increase coverage and fill in gaps in coverage. But with the increase in volatility, it is about matching risk and capital rather than buying insurance, according to Ciaran Healy, director of client solutions – EMEA, Aon Captive & Insurance Managers.

“It is a bit of a mindset change but an inevitable one. The insurance market is still doing what it does for P&C but it is not where it needs to be for emerging risks,” said Healy.

“There are two main ways for risk managers to address this. Can we deploy capital and if the risks are going to become more volatile, can we use a captive?”

Emerging risks are also changing the way we thought about traditional risks, said Healy. “For example, climate is leading to more wildfires and floods, and increasing the natural catastrophe exposure of physical assets.

Captives be used as a pre-funding mechanism, to create a capital buffer where insurance is not available, suggested Healy. “You are in effect incubating the risk until the insurance market opens up and you go to the front of the queue.”