The role of the captive in a changing risk landscape

This week sees the start of the European Captives Forum in Luxembourg and a chance for insurers, brokers and captive managers to come together in search of the next opportunities in risk retention and transfer.

The forum comes at a time of continual change in the corporate risk landscape. Companies are operating in an uncertain environment with new risks emerging and other risks accelerating due to macro events, both political and economic.

A global economic slowdown has been exacerbated by a rise in inflation, while the supply chain disruption caused by the pandemic has been heightened by the war in Ukraine. However, when the risk landscape changes, the insurance industry must change with it, says Loredana Mazzoleni Neglén, global head customer and distribution and innovative risk solutions for Swiss Re Corporate Solutions (SRCS).

She also believes that SRCS is well positioned to help both clients and brokers with this transition and the execution of their business strategies, a belief that is supported by the figures. SRCS’s combined ratio for the last nine months stands at 93.1%. Mazzoleni Neglén attributes this to a refocus on underwriting and a repositioning of the portfolio that commenced back in 2019. This meant being more selective about coverage in certain lines and keeping more discipline in underwriting. More importantly, says Mazzoleni Neglén, the customer has remained “front and centre” throughout these strategic changes.

“We have aligned our underwriting with the clients’ needs and have invested strongly in our differentiating assets, and focused on the delivery of customised alternative risk transfer solutions for corporates and their captives,” says Mazzoleni Neglén.

“We are also now investing in our Risk Data Services (RDS) offering, which leverages our latest technology, data and modelling capabilities to offer solutions that are unmatched in the market,” she says. The RDS service for corporates was launched on 6 October, after several months of testing and development.

Captive market growth

One consequence of the changing insurance landscape is the increased importance of the captive market. Rising premiums and decreasing capacity in certain lines have seen more corporates retain a greater portion of their risk in order to lower their total cost of risk.

Those two main drivers have prompted even more the move to use captives as a risk financing tools, says Mazzoleni Neglén. “At SRCS we believe this change is structural and not just a cyclical phenomenon. Corporate risk managers are looking to rebalance their risk retention versus risk financing strategy.

“We see this particularly among corporates in the manufacturing, energy, mining, infrastructure and tech sectors, where they are using captives much more to manage the increased retention of risks,” says Mazzoleni Neglén.

In the last 12 months, this growth has been especially noticeable in the €100bn+ markets, where there are more captives now than there are traditional insurers, with an estimated 7,000 captives in 70 domiciles. In turn, says Mazzoleni Neglén, this has amplified the demand for more capital protection for the captives, in the form of uniquely structured multiline, multiyear coverage.

SRCS is also looking to grow its captive insurance business across the continents while maintaining diversified insurance solutions portfolio. “We will grow surely but carefully in areas and industries where we have a differentiated proposition and can ensure superior solutions and service to the customers’ needs,” she says.

There are also two different dynamics: seasoned captives that are looking to increase their retention and are seeking risk financing solutions; and those firms that are entering the captives market for the first time.

For the first dynamic, SRCS can offer captive fronting on an on-demand basis as well as parametric-based policies that will provide predetermined payouts in the event of a claim. For the second dynamic, SRCS has developed a virtual captive, which enables companies to use a simulated vehicle that replicates the effect of a captive without the need to establish a regulated entity.

Consequently, the European Captives Forum this week is “an opportunity to reconnect with the captives’ community, to monitor trends and to listen to the needs of the corporates and captives managers”, says Mazzoleni Neglén.

For SRCS, its focus will be on the discussion around three key services:

• Cross-class protection for captives – sharing best practice for defining attachment points and lines of business coverage and how they can be bundled into a structured solution for captives.
• Legacy solutions – enabling freeing up of the capital for growth or releasing trapped capital and reducing volatility by transferring (re)insurance liabilities for portfolios.
• RDS for captive owners – helping captives take full control of their risks by leveraging underlying captive data to produce valuable analytics on individual exposures retained by the captive.

Risk Data Services:

The launch of the RDS platform is a testament to the superior use of technology, data and modelling, says Mazzoleni Neglén. It creates a “digital twin” of the captive’s assets, which can be used to establish a risk profile that can form the basis of their risk transfer strategies. This data is then enriched by the Swiss Re Group’s data and models to get a wider risk exposure perspective. Risk managers and captive managers can then run risk profiles, scenarios and decide what exposures they retain and what they transfer or hedge out to the insurance market.

The platform specialises in three areas currently:

• Property exposure management – offer valuation of their exposure across all their global assets.
• Sustainability compass – a breakthrough way to understand secondary perils linked to climate risks, such as drought and wildfires. This can help captives to manage their insurance and regulatory reporting.
• Supply chain resilience – the ability to see the entire supply chain network and discover any vulnerability there might be for the captives, which can then be proactively managed.

The plan for the future development of the platform is to encourage brokers and clients to contribute their own data to create a network effect. “These tools not only enable corporates and captives to take more control and to lower their total cost of risk, but also build more resilience into the organisation,” says Mazzoleni Neglén.