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Companies turning to captives and ART to plug gaps in emerging risk cover

Corporates are increasingly turning to captives to help solve problems in finding insurance cover for emerging and difficult risks, said expert speakers at Commercial Risk’s Global Programmes event.

Pandemic, climate change, cyber and supply chain risks are a challenge for insurers, and risk managers are questioning the reliability and relevance of their response.

Speaking during a panel debate at the virtual conference, Steve Tunstall, general secretary, director and co-founder of Pan-Asia risk management association Parima, said: “When I was first a senior risk manager 20-plus years ago, maybe a quarter to a third of my risks were insurable with third parties, but now I am down to about 10% and I suspect most risk managers are as well.”

For example, there are currently serious concerns over cyber insurance price increases and capacity withdrawals, only a few years after insurers were bullish about the cover.

Mr Tunstall said the current situation with cyber is just the tip of the iceberg. “It is changing exponentially for almost every business on the planet. If the insurance industry wishes to remain relevant to corporate risk managers, then it really has to work out what it is going to do in this space,” he said at the event sponsored by Allianz, AIG, AXA XL, Axco, Globex Underwriting Services, Marsh, TMF Group, Willis Towers Watson and Zurich.

Fellow speaker Brian MacNamara, head of global fronting, alternative risk transfer at Allianz Global Corporate & Speciality, said captives are seeing growing interest and usage, particularly for financial lines and cyber risk, because of the capacity crunch.

He said insureds will have to take greater retentions for property, E&O and cyber cover, and believes many large companies have the potential to take on greater risk.

“Insurance isn’t the panacea for everything that is happening at the moment. Some of the risks are generally uninsurable by their nature,” said Mr MacNamara. “Will the capital markets step in? They tend to focus on nat cats – will they look at risks such as cyber? Possibly. Whether they will want to get into long-tail risks or cyber and so on, I think will be an interesting question.”

Mr Tunstall is definitely seeing an increase in alternative ways to protect the total cost of risk at big organisations.

“And this approach will continue, as the third-party markets continue to be unreliable, and risk managers still have to solve their risk problems,” he said. “A lot of companies, especially in Asia, are starting to explore captives, as their partners who promised them the earth for ten years are now pretty unreliable,” he said.

Mr Tunstall noted that a number of companies are specifically setting up small protected cell companies, for relatively low cost. “And they are basically doing it as a holiday,” he explained. “So if insurers don’t want to sell D&O cover to a company for a couple of years, then they will go and do it themselves in a cell captive until the insurer gets back to the pricing it is used to,” he explained.

Stephen Morton, head of multinational, EMEA at AIG, said: “We are seeing a large increase in captive usage, putting the emerging risk in with some of the more stable risks, enabling the captive to build up the data that will enable insurers to fully assess the risk that is being presented. We are also seeing an uptake in protected cells. Our hope for any captive is that it is part of a long term risk management strategy and not a knee-jerk reaction to a hard market.”

Francois Malan, chief risk and compliance officer at Eiffage, pointed out that captives are only really a solution for larger companies, and are simply not viable for very small firms.

He said large insureds don’t want to transfer all their risk, but need insurers to cover more severe losses that they cannot afford on their balance sheet.

“We want to revise our risk transfer strategy, keeping some risk that we transferred before in the soft market. Insurance is not the miracle solution for us, it is just a tool,” he said.

Mr Malan also pointed out that the state has a role to play in helping with these difficult risks.

You can still sign up here for the rest of the Global Programmes conference that takes place on 14-16 September, supported by risk management associations Airmic, Belrim, Ferma, GVNW, Narim, Parima and Rims.

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