There are many articles in the insurance press about the hardening insurance market and challenges over risk coverage. However, I thought that a recent article1 with Oliver Wild (president, AMRAE) captured the essence of the challenges facing risk managers. “... the sharp rise in rates, reduction in capacity and increased risk adversity from insurers as a spectre looming over 2021.”
The article talks about the challenges in the French market, but I think he speaks to the global community when he goes on to say, “It’s vital to help companies invest in risk management and to allow them to self-insure, because the market is not responding”.
So, what are the options for companies considering a captive in 2021?
Traditionally, smaller captives tend to outsource jobs to a captive manager, most of which will offer specific service bundles to accommodate their captive management needs. For larger and well-established captives (according to Zurich Insurance2 they should have at least 10 million annually in premiums) it is worth looking at insourcing some of these services. “Insourcing does not make sense unless it is of significant scale” indicates Jonathan Groves in an interview with Strategic Risk3. He continues: “Those running particular risks that are unique and doing things that are particularly specialised would probably look to self-manage. There is logic to doing it for some of the pharmaceutical companies, larger mutual and financial institutions”.
The Stategic Risk article continues: “Self-managed captives are, however, in the minority. It is estimated that only 4% of the 6,135+ captives globally, are self-managed.”
So, other than the Zurich rule-of-thumb, how does a company explore its options for self-insurance and what happens if these factors change in the future?
“If you leave quality out of the equation, it’s only about cost and efficiencies.” says the then Heineken insurance4 manager Eric Bloem, “You can do it by yourself in the correct manner, or a consultant can do it for you: it’s a matter of choice. Once captives become more mature, they’ll slowly shift to doing it themselves. The biggest captives in the world are 100% self-managed and the smaller captives lean heavily on the consultants, as we did in our early years.”
Therefore, it makes sense to look at the core business of the captive (the management of insurance premiums and claims). With the appropriate technology in place, for example a state-of-the-art policy and claims administration system, the need to invest in additional human resources is limited. Ideally the system would cover credit control and financial reporting, as well as being designed to capitalise on the digitisation of the transactions in the value chain. Other functionality that would be required is the ability to provide in depth insight into the data, including loss triangulations, P&L views from asset level through to the top-level captive view and the ability to provide predictive analysis.
The costs of these systems then need to be balanced against the consultancy and service costs provided by captive management companies (of which there are many). These companies can offer a cell-based solution for captives where the capabilities and technologies of the captive manager are shared among multiple companies. The services and specialities of these companies are varied, shopping around is vital to find a solution aligned to specific business needs.
Technology alone does not provide the ability to become more independent from service providers, but it does allow the captive to embrace the future through digitalisation, with the ability to connect with emerging technology solutions. Careful thought is required to understand the needs of the captive and how service providers can continue to support the captive throughout its lifecycle.
Moving from outsourced to insourcing is therefore driven by premium turnover, the number of transactions made by the captive, the types of risks and the degree of the establishment vs. the costs of managed of self-managed solutions. Understanding the costs and benefits at this stage is critical to choosing the correct solution and knowing when that balance may change in the future.
Well, this was the situation before the current global pandemic. 2020 is the year where most captive owners are reconsidering the use of their captives. Why is this?
As we said at the beginning of this blog, it appears corporations are being hit with a combination of the hardening market and an increase of risks that are difficult or impossible to find insurance cover for, such as business interruption exposures5. Indeed, in their 2020 Captive Landscape Report6 Marsh reports a significant increase in premiums in both the specialty lines and the traditionally underwritten lines of business. The development of higher costs means that the number of captives being in the position to consider insourcing is likely to see significant growth.
However, I feel it is the uncertainty of the current situation that drives the most interest. Going back to Oliver Wild, “There is a limit to the number of systemic shocks you can deal with, so we need to be able to have the measures to absorb at least part of that shock, and writing cheques is a short-term solution,”.
Combining technology and the current state of the hardening market provides a huge opportunity for Captives to be established or for a managed operation transition to becoming self-managed. Enabling the captives to move to a digital platform (whether managed or self-managed) and deliver operational efficiency will be an attractive proposition for many parent companies. The COVID pandemic has paved the way for change, as the market looks to exploit technology to maximise effectiveness.