More UK firms in talks to buy revolutionary connected risk cover

Following AstraZeneca’s ground-breaking reinsurance deal last month, more UK companies are looking to use their captives to cover so-called “connected risks”, the Corporate Working Group, a network of UK risk managers behind the concept, told Commercial Risk.

AstraZeneca revealed in May that it has taken out a five-year ‘business resilience insurance policy’ to cover connected risks. The multi-year solution sits as a reinsurance layer above the captive and compliments AstraZeneca’s existing P&C multiyear, multi-line reinsurance programme. The policy was taken out with three global reinsurers, and covers supply chain disruption, reputational damage and product withdrawal.

Unlike traditional insurance, the solution provides AstraZeneca’s captive with broad cover for these three connected risks, said David Broughton, head of insurable risk at Centrica and chair of the Corporate Working Group, which was established by risk analytics firm Russell Group.

According to Broughton, the industry needs to move away from peril-based traditional insurance products to considering risk from an outcome-based perspective. The recent reinsurance deal uses an “evidence-based” approach that pays out when AstraZeneca suffers a demonstrable loss from supply chain disruption, reputational damage or a product recall, irrespective of the cause.

The cover takes a more holistic view and is specifically aimed at addressing connected risks that span business segments, lines of insurance and risks. For example, a single loss event – such as a cyberattack, natural catastrophe or a large insolvency – could create a “ripple effect” impacting multiple companies and risks at the same time. But traditional insurance products underwrite these risks at a line of business or peril level.

The connected risk reinsurance looks to cover the diversification of the captive, rather than specific risks, Broughton said. “In simple terms, what reinsurers are insuring is the capital of the captive. When you look at the diversified mix of business and capitalisation of the captive, the likelihood of reinsurers having to pay out on this cross-class aggregation is low,” he added as Airmic gathered for its annual conference in Edinburgh.

Centrica has been talking with reinsurers about a similar type of reinsurance contract, albeit for different risks. Other members of the Corporate Working Group are also “having similar conversations” with reinsurers, albeit at different stages, according to Broughton.

“There is a lot of interest in this among the members of the working group, although it will not be right for everyone. You do need a large captive to make this viable for the reinsurers,” he said.

“What the reinsurers have done [with the AstraZeneca solution] is open the door to any company to start a conversation,” Broughton added.

He expects that the connected risk reinsurance solution will now be extended to other risks, while capacity could eventually increase as more reinsurers are brought onboard. “There are conversations going on as we speak with other markets that we believe have the capability, the balance sheet and breadth of expertise to do this. Whether they want to do so is part of that conversation,” he said.

“Like any new development, once people see it works, and that there is a margin in it for the insurer, and it is good for the buyer, it is likely to grow. The challenge compared with traditional insurance thinking is there is only a certain number of organisations this will work for,” said Broughton.

The concept – which was three years in the making – was risk manager led, rather than a broker or insurer product initiative. The idea was developed by members of the Corporate Working Group, a group of more than 30 UK risk managers formed in 2018 to use data and analytics to facilitate innovative insurance solutions.

Unusually, the AstraZeneca deal was driven by the pharmaceutical company’s insurance and risk team, which carried out its own analytics and drafted the policy wordings, supported by consultants including the Russell Group. The deal did not involve a broker.

The working group was established by corporate insurance buyers to drive changes in the insurance market and the way it develops products.

“This is a different way about thinking how the market works. It challenges the way the market has historically developed products, where carriers have developed products inhouse with the support of brokers, but without talking to customers. That might work for less complex and mid-sized businesses, but not for large complex businesses,” said Broughton.

“Buyers are concerned that if insurers do not adapt to the challenges that companies are facing, insurance will become less and less relevant,” he said.

The Corporate Working Group is also looking at ways to use technology to improve the renewal process, which requires buyers to share a large volume of information with its insurance partners ever year. “As a working group, we are challenging the processes the insurance industry follows. That is not to say they have not worked in the past, but whether they will continue to. If they are not going to, we need to put our hands up and facilitate the conversation. If we don’t, we will hit a wall,” said Broughton.