The time has come to embrace ART, says Igrea president

The time has come for companies to look at alternative risk transfer (ART) strategies to mitigate the effects of the hard market and boost protection against uninsurable risks, Daniel San Millán, president of Spanish risk management association Igrea, told members at a virtual conference. The use of ART will help insurance managers deal with the increasingly hostile insurance market. But Mr San Millán also stressed that options like captives, structured insurance products and parametric solutions can help corporates tackle risks that the traditional market currently has no answer for. And Igrea’s president said the fact that many companies have built up reserves to protect against a possible protracted, Covid-19-fuelled recession means they have the cash on their books to make such solutions more possible. “All these solutions require pre-funding. Many companies have stockpiled liquidity, either issuing bonds, looking for credit or selling assets. In some cases there is an excess of liquidity that costs us money… This is the moment where financial departments will listen to us. It is a good way to use that money,” said Mr San Millán. He acknowledged that boards may be resistant to innovative risk financing but stressed that it is the role of risk managers to look at the options and make their case. “We have the obligation to make proposals,” he said. “It is clear managers in our companies are not familiar with some alternatives to finance risks, but it is our duty [to explain them].” Agustín Berrenechea, head of construction in western Europe and head of product specialties Iberia at Willis Towers Watson, gave some examples of how parametric covers can be used to protect buyers against risks such as non-damage business interruption (NDBI). He said parametric solutions lend themselves to NDBI because they don’t necessarily need an event to trigger cover and the triggers can be tailored to the needs of the buyer. Mr Berrenechea explained that a French theme park purchased parametric cover to protect against a fall in visitor numbers, no matter whether this was caused by a terror attack, pandemic, strikes or nat cat event. The trigger, in this case, would simply be reduced attendance and a decrease in turnover. Another example involved a policy for the hotel industry, where the cover is triggered if an index widely used by the sector falls below a pre-agreed level. The index in question is called RevPar, or revenue per available room, and is calculated by multiplying the average daily room rate by its occupancy rate. Mr Berrenechea also told Igrea members that an airline arranged a three-year policy triggered if the number of passengers drops below an agreed level. In this case, though, it requires pre-agreed events like natural perils, terrorism and airport damage to trigger the policy. But attendees at the event were also warned that, for all the progress made by parametric coverages, they are not a magic solution for the insurance market’s woes. “Parametric solutions are limited but they can play a role as a complement and make sure that insurance coverages are the most adequate,” said Miguel Martínez Paniagua, the managing director at Marsh in Spain. “For property or casualty [insurance], one can find 40, 50 markets around the world. For parametric solutions, the market is much narrower,” he added. Mr Paniagua presented another alternative to traditional insurance in the shape of structured insurance products, where companies pay a premium into a fund that is built to finance future losses. He explained that those products play a role similar to a captive but without having to deal with the red tape and regulatory demands that make captives burdensome and sometimes expensive. Structured insurance products have their own complications. Calculating how much to pay in is a challenge that requires actuarial techniques often beyond the capabilities of non-insurance firms. In addition, the funds have to be built up over a number of years before they can pay for actual losses. “Structured products also have their own universe of insurers and reinsurers, and it is very narrow,” Mr Paniagua said. Erlantz Urbieta, managing director at Aon in Spain, told the audience that rent-a-captives have emerged as an alternative for companies that want to mitigate the effects of the hard market but do not have their own captives in place. He said a higher number of clients are choosing this path to manage retention or transfer risks in a more flexible way. “Retaining risks today is no longer a voluntary decision… The market very often imposes it,” he said. The Igrea conference also voiced risk managers concerns that the effects of the hard market are moving beyond difficult renewals to claims, where some report things are getting more tricky for buyers.

The time has come to embrace ART, says Igrea president

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