Captives Forum: Hard market prompting greater sophistication in insurance buyers

At the opening keynote of the Airmic Captives Forum, held at Lloyd’s of London on 21 March, Scott Feltham, group insurance manager at Compass Group PLC, Peter Carter, head of captive & insurance management solutions at WTW, and Dr Henri Winand, CEO/co-founder at AkinovA, discussed taking a strategic approach to risk financing.

Feltham explained that his biggest focus today is finding solutions to insure intangible assets and exploring whether the group’s captive can support such efforts.

“One of the primary challenges relating to intangibles concerns the lack of available data to model loss picks, etc.,” he said.

“Consequently, at this current time, and with the arguable exception of cyber risk, there is limited appetite in the insurance market to provide conventional risk transfer solutions to intangible risks.

“The use of a captive as a means through which to incubate certain intangible risks offers a potential solution in terms of collecting data to help illustrate the impact of intangibles.

“Buyers of insurance might then, in time, take this data to the external market with a view to securing a more a conventional risk transfer product as a means through which to offer protection against intangible risks.

“There are a number of insurers who are open to these kinds of discussions and may be willing to put forward a solution, again, provided that there is a sufficient volume of data to model the loss pick.”

Carter said that insureds have become more sophisticated and flexible in using a blend of risk financing strategies, including greater utilisation of their captives, to achieve their objectives.

“The continuing hard market, intensified by the difficult January reinsurance renewal, has led to challenging discussions on the property side,” he said.

“We have seen insureds placing more risk, including the primary layer, in their captive and accessing direct and facultative reinsurance to protect the captive balance sheet.”

Carter added that “difficult-to-insure risks such as cyber” continue to go into captives, with risk managers using both single parent and group structures to find solutions.

AkinovA is a new piece of neutral infrastructure that is trying to bring the capital markets closer to risk, by working more directly with insureds and their captives.

Winand said the capital markets are keen to play a more direct role, particularly on large accounts, and can address the intangible assets challenges.

“Investors read and see a lot about, in particular, listed corporates analysts, share price, etc.),” he explained.

“They read and see a lot less about corporate (insurance) exposures (until they hit share price for instance).

“With captives, and insurance in general, we as an industry often use our own industry business dictionary, our own language with our own wording (which is different for most things), with RoL, reinstatement, etc. So we need to translate that into capital market speak – it’s all the same concerns after all.

“Large investors are happy to dig into the underlying risks as a whole but do not care, usually, about a line of business or arbitrary classification around the risk classes we use and don’t want to spend ages on each contract’s wording, unless you want to limit yourself to a small universe of specialist investors.

“Investors, however, with Berkshire being the archetype, love cash (premium), love float (premium) and would love to have exposure, with the right returns remote from capital markets to reinvest into assets.”

Airmic’s second Captives Forum welcomed more than 130 risk, insurance and captive professionals throughout the day and covered topics such as captive boards, cyber, alternative reinsurance strategies and ESG initiatives.

Members new to captives were also able to attend a series of Boot Camp presentations which talked through the full captive formation process and the roles of service providers in accounting, tax, reinsurance, claims and banking.

Airmic plans to hold another Captives Forum in March 2024, with the date to be confirmed later this year.