Speaking at Airmic’s Captives Forum, Scott Feltham, group insurance manager at Compass Group, Peter Carter, head of captive & insurance management solutions at WTW, and Dr Henri Winand, CEO/co-founder at AkinovA, highlighted how the challenge of risk financing intangible assets is becoming a focus for captive owners, and how capital markets are looking for a role to play.
“One of the primary challenges relating to intangibles concerns the lack of available data to model loss picks, etc.,” Feltham explained.
He continued, “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 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 noted 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.
He said, “The continuing hard market, intensified by the difficult January reinsurance renewal, has led to challenging discussions on the property side. 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.
Meanwhile, Winand suggested that capital markets are keen to play a more direct role, particularly on large accounts, and can address the intangible assets challenges.
He stated, “Investors read and see a lot about, in particular, listed corporate analysts, share price, etc.) 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.”
Winand continued, “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.”
All aforementioned comments stem from Airmic’s second Captives Forum, which hosted more than 130 risk, insurance and captive professionals covering topics such as captive boards, cyber, alternative reinsurance strategies and ESG initiatives. The firm has plans for another Captives Forum in March 2024.
