Captives Come to the Fore as Businesses Seek Hard Market Alternatives

The hard insurance market is highlighting the value of captive insurance companies both to control risk transfer costs and to provide coverage that might not be available currently in the traditional market.

"With the market we find ourselves in, there is a lot of need for alternative solutions, and captives are one of the key ones," said Matthew Latham, head of global programs and captives at AXA XL.

Speaking as part of a session titled "Back to Risk Financing Basics: What Are the Alternatives to Insurance," as part of the Federation of European Risk Management Association's virtual 2020 European Risk Management Seminar, Mr. Latham said that as buyers look to address the hard market, a challenge with simply retaining more risk is the ability to reserve adequately for long-tail liabilities.

Instead, using a captive insurance company to address risks for which traditional coverage is either too expensive or unavailable offers several benefits, Mr. Latham said. A captive allows multinational companies to centralize optimal retention levels across the organization. It can also drive the organization's risk management culture. "Risk management culture is key," Mr. Latham said. "You have to make sure that everyone in your company understands that you're retaining part of your risk."

Captive insurers also are a great way to capture loss data, he said, and the captive can bring stability to risk transfer pricing and budgeting.

"It's no surprise to hear that there has been an increase in captive formations in the past 12 months," Mr. Latham said. "I think there will actually be bigger increases in 2021 because there is actually a time lag in getting these things done."

"We've also seen captives retaining more risk," he said, as well as adding new lines of business such as cyber risk, professional indemnity, and directors and officers. "These are all classes of business which I would say are particularly hard hit in the market at the moment," Mr. Latham said.

"What we are trying to determine in the alternative market is where is the optimal point between the client on one side and the insurer on the other side—where the risk should lie," said another panelist, Karsten Berlage, regional head of Americas for Alterative Risk Transfer at Allianz Global Corporate & Specialty.

"Often, we hear that risks are uninsurable," Mr. Berlage said. "What gets us excited on the alternative side is maybe we have something that the traditional markets are striking out on."

Bart Smets, head of the Insurance and Risk department at Belgium-based global materials technology and recycling firm Umicore, said his company elected to create a reinsurance captive in response to hardening markets.

While the hardening market resulted in less capacity, tighter policy wordings that reduced coverage, and higher prices, in Umicore's case, it was also causing higher deductibles, he said. The main reason we will be using the captive is for a deductible buyback or buydown program," Mr. Smets said.

The company expects the captive to be in operation on January 1. "It's quite a journey," Mr. Smets said. "It takes approximately 2 years from start to finish, and there are some busy months to come."

Stephane Yvon, insurance and personal insurance policy director at EDF, moderated the session.