Captive audience

Over the past few years, insurance pricing experienced some of the highest increases ever seen and unfortunately, following the Auckland Anniversary weekend floods and Cyclone Gabrielle, by and large, this trend is going to continue.

As prices rise and coverage terms and conditions became less favourable, many organisations have begun to explore alternatives to the commercial insurance market, including using captive insurance.

By way of example, in the Pacific alone, the number of captives established and managed by Marsh has increased three- fold in the past five years. Primarily, this growth comes in the form of single-parent captives and cells in Protected Cell Captives (PCCs).

In 2020 and 2021, 40 per cent of new protected cell structures managed by Marsh underwrote cyber coverage, with more than US$70 million in cyber premium under management. The domain to consider these alternative structures falls well beyond the corporate listed or global entities.

When thinking about risk and financial resilience, one key attribute would be – can we make safe, then successfully recover from an incident/event? Be they cyber related, a natural catastrophe or liability driven, at the heart of the recovery is:

Who is going to pay? How long will I/we be impacted/disrupted? Can I/we prevent this from occurring again?

Why now?

As the traditional insurance market continues to harden, we are at a pivotal point where organisations are being more proactive in exploring other risk transfer options and making conscious changes to the way they manage, finance and transfer risk.

Rather than simply accepting what the bounds of the insurance market has to offer, organisations are becoming more open to finding alternative ways of achieving risk-based financial resilience.

There are three primary motivators that are driving organisations towards considering these types of solutions.

1. These solutions can offer cost efficiency and resilience that the traditional insurance market may not be able to offer.
2. They establish a different avenue for obtaining more insurance capacity or higher limits.
3. They open the door for exploring protection options for previously uninsurable risks.

Why use a captive or cell to insure some of the organisation’s risks?

While a captive or cell in a PCC is not a silver bullet, considering these alternatives provides organisations with flexibility and options for providing additional financial resilience to their broader risk management and transfer strategies. For example, having cyber coverage in a captive allows you to pivot during or prior to a renewal in the three key areas of cost, coverage and capacity.

It helps reduce the total cost of risk by retaining an amount of cyber risk in the captive or cell, thereby reducing the reliance on insurers, and captures costs and profits that are otherwise “leaked” to insurers. A captive or cell can also be used to lower the cost of cyber liability by obtaining a high deductible cyber policy on the commercial market and “buying down” that deductible.

Parametric insurance solutions

Parametric (also referred to as event- or index-based) insurance solutions are custom-built to cover a predefined event that could pose a threat to your business and present a way to “pre-agree” a claim pay-out following the occurrence of a predefined event/incident.

The pre-agreement nature of a claim pay-out under a parametric insurance solution provides more certainty to the organisation, whereas traditional insurance and claims processes can be lengthy, uncertain and open for assessment/interpretation on a case-by-case basis.

Parametric insurance solutions offer a formulaic claims recovery based on agreed triggers and financial parameters that are structured around a transparent third-party index.

Under traditional based insurance, there is no guarantee that a claim will be paid until the end of the process, whereas under a parametric insurance solution, the certainty is provided upfront. This helps to remove uncertainty and allows for greater efficiency and earlier answer to the question – who pays?

Parametric solutions are now an active part of several New Zealand organisation’s risk-financing programmes, so perhaps it’s time to consider if this is relevant for your organisation.

Conclusion

The ongoing challenges in the insurance market, combined with the uncertainty over the frequency and severity of events, makes it an even more pressing item for organisations to ensure they have the appropriate level of financial resilience to keep pace with the dynamic environment.

Using captives, cells in PCCs, or parametric solutions as part of your overall risk financing strategy can help set a steady course no matter the commercial insurance market trading conditions. 

For more information, contact stephen. walsh@marsh.com (Chief Client Officer, Marsh NZ) or andre.kyburz@marsh.com (Head of Alternative Risk Solutions, Marsh Pacific).