Coverage gaps mounting as co-insurance makes life tricky for buyers in hard market

Coverage gaps are becoming a big problem for insurance buyers in the current market, as they are forced to use a growing number of co-insurers with different risk appetites and offering different terms and conditions to find the capacity they need, experts warn. They agreed that captives are a good way to plug these gaps but told risk managers they must see the vehicles as a long-term play rather than a short-term fix. Speaking at Commercial Risk Europe’s Risk Frontiers recent event in Antwerp, Herman Kerremans, CEO of Howden Belgium, said it is now a “big challenge” to renew large insurance programmes. Even when risk managers start renewals early, they still have to wait till mid-November or early December to receive quotes for end-of-year renewals, said the broker. And things are made more difficult because insurers don’t deploy capacity as they did in the past, with buyers being forced to create complex towers of co-insurers to get the same amount of capacity, continued Kerremans. Buyers can often end up with ten or even 15 insurers on the same risk, which increases the likelihood of coverage gaps because of the various wordings, terms and conditions offered by the different carriers, he said. “The days when everybody was aligned and you could place and finish a placement with the same terms and conditions for everybody are no longer the case for things you need to place year on year. I have recently seen renewals where many insurers were involved and a lot had requirements in terms of exclusions, which were not imposed by everybody. Secondly, there were warranty statements that were not asked by everybody on every layer. And third, there were conditions precedents that were not provided for on every layer, and so on,” said Kerremans. “This worries me that sometimes clients are buying cheese with a lot of holes in it. This worries me a lot,” warned the broker at the event held in association with the Belgian and Dutch risk management associations Belrim and Narim. “For example, if you have an exclusion on your third excess layer, which is not applicable on the layers underneath or the excess layers above, when there is a claim how does your dropdown clause work on the specific layer if the underlying layers were eroded by an issue or a matter not covered under that layer? I can guarantee you this can really be a nightmare,” he continued. Kerremans said sometimes there is no other choice but to accept this situation but stressed it is vitally important for insureds to understand, as best they can, where coverage gaps and holes exist before a claim hits. He encouraged buyers and brokers to stress-test the coverage upfront but conceded this is “extremely challenging” when you have ten or more insurers on a risk. Oliver Schofield, managing partner at captive and alternative risk transfer expert RISCS, said captives offer a solution to the co-insurance problems and can help plug some of the gaps. “The captive cannot only offer the coverage at the various different layers and difference in conditions within those layers, the captive can act as the vehicle that brings all of those exclusions together and provides that additional cover. They can also provide a cost-effective way and mechanism to fill in the gaps in terms of capacity in different layers. Ultimately, if you can’t buy that capacity in the market, the captive is a very good solution,” he explained at the conference sponsored by AIG, Aon, Chubb, CMS and Howden. Schofield said there is growing interest in captives currently, as always in a hard market, but urged risk managers to view captives as a longer-term strategic risk management tool. President of Belgian risk management association Gaëtan Lefèvre was in full agreement. He said there is growing interest in captives and they are one of the best solutions to coverage problems. But they won’t solve every issue and must be thought of as a long-term benefit rather than simply a reaction to tough market conditions, he continued. It takes time for a captive to be effective and properly support your business, added Lefèvre. Pierre-Emmanuel Bogaerts, country manager for Benelux at AIG, said he is seeing Belgian organisations making more use of existing captives in the hard market. But he too cautioned against setting one up just to combat the difficult environment for buyers. “Creating captives takes a lot of time, so if you don’t have a running captive for the time being, I don’t think it would be a short-term solution to the hard market,” he said. “They are a good solution. A trend we see with clients in Belgium is those that already have a captive are putting new risks in the existing captive. There are some newly created ones but it is more limited. We see lines where buyers are missing capacity, one example is cyber, and clients are wondering about using their captives,” added Bogaerts.

Coverage gaps mounting as co-insurance makes life tricky for buyers in hard market

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