Captives on buyers’ minds amid continuing harsh market

Interest in captives remains buoyant among insurance buyers, particularly as insurance carriers have moved to tighten terms, rates and capacity available at recent corporate renewals. Claims are also more likely to experience challenges from insurers, according to Airmic research.

Airmic polled its members in a Pulse Survey in January, “The Harsh Market – with a focus on claims”, the latest in a series on insurance market conditions. The study was followed up by an Airmic Live webinar discussion, in which brokers and insurance buyers discussed their experiences of the challenges insureds face.

Claims focus

Almost half of respondents saw an increase in challenges to their claims throughout 2020, according to the Pulse Survey in January. Leading reasons for the rejection of their claims included: the use of basis clauses or conditions precedent by insurers; the late notification of the claim, the level of insurance purchased was inadequate; breach of warranty or other policy conditions; and the inability on the part of the policyholder to provide information requested by the insurer.

However, in other respects, the insurance market continues to provide a valued claims service. The study found that where claims were paid out by insurers, the claims service experience, as well as the speed and amount of the payment generally met the expectations of Airmic members. There was also no reported increase in intent to litigate claims, although members are more likely to instruct their broker and lawyers to support their claims in future, according to the survey.

One insurance buyer commented at the webinar that a positive picture was nonetheless negative reasons, as businesses have been badly hit by the Coronavirus pandemic period leading to a reduction in exposures.

“On the contrary, it’s all down to the negative of our not operating in certain sectors or in certain parts of the world for much of the past year. That’s not the same as saying the claims experience has been good – we simply have not been fully operational,” the insurance buyer said.

While reduced economic activity has reduced the frequency of incidents that lead to claims in many lines of business, attention is also turning to what’s around the corner.

“Our main focus what is what’s going to come out of Covid-19,” said one insurance buyer. “We may see a rise in different types of claims, such as employer’s liability, or an increase in mental health related claims. With the shift to remote working, we should be looking at risk management of the home office workspace, and for potential liability claims resulting from people working from home.”

Convincing the board

For many company boards, the suddenness of an insurance market turn can come as a rude awakening after growing accustomed to years of soft market purchases continually coming in at or below budget, presenting a problem for insurance buyers trying to manage budgets as well as expectations.

“The reaction of the boards is typically one of surprise at the speed that a hard market came about. The board need to appreciate that the market is changing rapidly, however they’re often not looking at renewal until soon before,” said one insurance manager.

“You may only have a five-minute slot once per quarter, so you need to condense information and deliver that message. It’s important to explain how you intend to navigate the hard market, putting plans in place to achieve best possible results,” the buyer added.

Captive audience

Considering a ‘Plan B’ or even a ‘Plan C’, might include going beyond traditional insurance market options to look at alternative risk transfer solutions, include the use of captive insurance vehicles.

A trend towards the creation of new captives, and increasing use of existing captives, has continued since the previous report issued in September 2020, polling insurance buyers’ attitudes in summer last year.

Among respondents whose organisations do not already have a captive, 23.4% are now considering forming one in response to the hard market, up from 20.3% in the previous Pulse Survey.

One insurance buyer noted during the webinar that not considering starting or expanding a captive might be “doing yourself a disservice”, particularly for risks such as non-damage business interruption, which insurers have little appetite for which to provide cover.

“However, the board might take some convincing, and setting up and managing a captive doesn’t happen overnight – I think you need six months minimum,” the insurance manager added.

Looking at captives, as well as seeking quotes from traditional market rivals, can be a positive intelligence gathering exercise, even if an insured ends up returning to their original provider, webinar speakers agreed.

“I would shop around and engage with markets you’ve not dealt with. Appetites change and there may be opportunities to with which to engage, that either you did not have or know about previously,” said one speaker.

For long-term insurance partners, this is not the same as “chasing the cheapest deal” every recurring renewal, one broker suggested.

“We like long-term relationships; we accept it doesn’t always work in a client’s favour, but it usually does,” said one speaker. “If the broker says the client wants to remarket, that can often work better for them to look at their options, and then realise the benefits of the original relationship. And on a market-wide level it helps to keep us all straight and honest.”