RIMS Australasia 2021: Hard market sparks captive discussions

Higher insurance premiums and falling coverage has prompted many organisations to explore captive insurance and virtual captive structures, according to a panel of leading risk executives.

Richard Hearn, head of insurance risk at mining company BHP, said the group’s decision to form a captive insurer several years ago had proven to be the right move.

“My belief is that the insurance industry is failing, and not delivering what it used to,” Hearn said.

“I’ve seen the ups and downs of the market, but policy wording has become more complex, and there are more exclusions,” he added.

Over the past 12 years, BHP has developed its captive insurance arm rather than placing into the external market. Hearn said the company was “better off”, and said the company had saved significant costs, despite some large claims.

“It would be a dollar sign with 10 digits at the end of it,” Hearn said. “Claims are also settled in 12-15 months, and there’s no massive arguments with lawyers.” Hearn said BHP had grown its captive assets to a capitalisation greater than AUD$2 billion.

Hearn said analytics, strong risk management fundamentals, and a strong balance sheet had helped to make BHP’s captive plans a success.

However, forming a captive was not an easy process, and would not suit every organisation, attendees said.

Hearn said strong advice from a broker, Willis, had helped BHP to manage its captive operation. He said strong broker services, risk management, and risk engineering were required to make captive plans a success.

“You want all of those areas died down if you want to use a captive, as you can come undone quite quickly.”

“You can’t take a short term view. If you do that, you are setting yourself up for failure. You need a long term view backed up by good risk management,” Hearn said.

Willis Towers Watson’s Scott Kirkwood agreed.

“You need to understand your ability to retain risk, and look at what suits your needs,” he said.

Financing for intangible risks

Companies are exploring a host of creative solutions to risk-transfer in the Covid environment, according to Swiss Re.

Andre Martin, head of innovative risk solutions APAC at Swiss Re Corporate Solutions, said more companies were exploring alternative risk transfer measures, as the insurance industry had been “slow to respond” to changes in the corporate world, such as the shift from asset heavy to asset light strategies.

He said the Covid crisis was a “catalyst” for many to explore unconventional options.

“Some companies have outgrown their insurance programmes,” Martin said. “Because of the disruption from Covid, risk managers are asking what else they can do, and are looking at the alternative risk transfer market to see if they have solutions to navigate this emerging environment.”

Martin said risk managers were keen to fill protection gaps, and were keen for price certainty and multi-year certainty.

According to Martin, parametric “has proven effective” at filling gaps within traditional insurance programmes.

There were also growing discussions about captive arrangements amid the hard market, he added.

So-called virtual captives also offered organisations an innovative solution, he added. Virtual captives emulate the mechanics of a physical captive, but keep risks off balance sheet. They allow organisations to explore the benefits of self-financing without fully committing to a captive.

Martin described virtual captives as a “contractual insurance agreement that try to mimic or emulate the benefits of a real captive. A virtual captive is a contractual agreement of 3-5 years which allows companies to free up funds for a larger proportion of their exposure, using Swiss Re’s balance sheet as their captive”, he said.