A hard insurance market has traditionally been a bellwether for captive growth. Previous hard markets have seen existing captive owners make more use of their risk retention vehicles while also driving the formation of new captive solutions. This hard market is likely to be no different.
The challenge for insurance buyers and captive owners is how to best manage increased deductibles/greater risk retentions, while also softening the blow of increased re/insurance premiums.
A perfect storm
There is presently much talk of a ‘perfect storm’ in the commercial insurance market. After a prolonged soft market, prices have been rising in the past two years. This is a result of increased losses, reduction in capacity (particularly in distressed classes), market performance reviews, adverse loss reserve development and lastly, uncertainty surrounding the global pandemic and its impact on claims.
According to Marsh, global commercial insurance premiums increased by 19% in the second quarter of 2020, with significant price hikes in US public D&O (up 59% on average) and UK D&O (up 100%) driving rates up by 37% globally across financial and professional lines. Geographically, composite pricing increased in all geographic regions for the seventh consecutive quarter, led by the UK (30.5%) and the Pacific (31%).
Meanwhile, the long-lasting low interest rate environment has meant that insurance companies have, for a long time, been unable to prop up a disappointing underwriting result with investment returns. This is exerting yet more pressure on underwriters to charge more and increase deductibles – the point at which insurance attaches – a situation that is unlikely to change as we enter another global economic downturn.
In addition to pricing, insurance companies are incorporating tighter terms and conditions. The upshot is that conditions have become more challenging for insurance buyers, not least because their premiums are increasing and at the same time they are forced to retain more of the risk within their captives or on their own balance sheets.
An added dimension is the changing risk landscape. As organisations grapple with emerging and intangible risks such as cyber, reputation, supply chain and non-damage business interruption, the need for new and innovative risk transfer solutions has grown. Within AIG, we are seeing an increase in interest in alternative risk solutions as commercial insurance has become more expensive and capacity is harder to find.
Less capacity for cross-class placements
There is no one-size-fits-all solution. Different clients will have different needs and the onus is on all parties, including captive managers, fronting insurers, brokers and risk and insurance managers, to sit down and talk through the available solutions. This can include a number of creative and innovative options, such as alternative risk solutions and joint, scalable captive solutions, such as a multi-captive ‘mutual’ approach.
Single-captive stop-loss covers are becoming more challenging to place as there is a limited market for multiline products. While they are beneficial programme placements from a captive perspective, it is not always possible to enter into long-term agreements on cross-class aggregates when the market is hardening. Hence, a more traditional approach may be required, with separate towers for different classes of business.
The value to clients of a traditional approach to self-insurance is that they can widen their universe of potential re/insurance carriers, without necessarily paying a great deal more in premium. There is also the option to invite more reinsurers to the table if each line of business has its own stop-loss policy. This way, the whole market can be involved and insurance buyers can be sure they are getting a more competitive placement.
Insurers can also benefit from clearer insight into their maximum losses when taking a line-by-line approach to insurance. For clients concerned about the impact of higher deductibles and how this may cause greater volatility on their balance sheets – brokers, insurers and captive managers are working together to offer innovative solutions. Loss portfolio transfer, for instance, can spread the cost of a severe claims year over, say, three to five years, offering capital relief and smoothing out the impact of a loss.
In this challenging environment, there has never been a greater need for collaboration to develop solutions for insurance buyers and captive owners. The hardening trends are unlikely to reverse anytime soon. Even when capacity returns and premium rates decrease, alternative risk solutions can continue to offer value and complement traditional insurance placements. What is clear from the many discussions around this topic today is that the solutions implemented today will continue to play a large part in our clients’ long-term risk management strategies.
For insurers and service providers, this hard market provides an opportunity to differentiate and engage meaningfully with our clients towards managing global risks. It is about ensuring there is an alignment of interests and that we are ultimately arriving at the best solution for all parties. All parties collaborating towards the same goal builds trust, understanding and, inevitably, value.
Contributed by Dan Sammons, head of global risk solutions at AIG UK, and Stephen Morton, head of multinational, Europe, AIG