Risk managers are increasingly aware of emerging risks and have a growing appetite for risk-transfer products. Yet, the traditional marketplace has been slow to respond. Captives can help solve this problem, says Owen Williams of Zurich.
Traditional insurance markets can be reluctant to commit meaningful capacity towards emerging risks, needing first to develop a fuller understanding of those exposures to successfully underwrite new products. Captives, however, can offer a solution to this problem. Not only can they empower risk managers to finance risk in a more flexible way, but Captives can also help to increase the traditional market's appetite for their business.
Combating the cyber-threat
Technology is moving at an incredible pace, revolutionising the way we do business and the risks we are all exposed to. Over the last few years, businesses have become increasingly reliant on their network capabilities and more susceptible to cyber-threats. However, as these risks are still very much emerging, there is very little historical collated data to aid insurers’ full understanding of them, particularly the specific risks facing individual customers.
To put it another way, it is a bit ‘chicken-and-egg’. Companies are unlikely to hold historical loss data until they have an insurance product, but the market is equally unlikely to provide meaningful capacity without the data that enables them to understand and underwrite those risks.
For corporates concerned about such exposures, a Captive can be a very effective solution. There are a number of reasons for this. Firstly, as the captive is controlling that risk it helps collect that essential data. Secondly, by taking the first layer of exposure, you are moving traditional markets further away from a potential loss, and therefore their risk appetite increases. And thirdly, you are showing a willingness to actively manage your exposures, which improves the market’s confidence in you as a risk.
All of this not only benefits a business now, by helping to achieve its desired capacity and cost of risk, but can actually help customers achieve better policy terms in the future when accessing the traditional insurance markets. Despite these benefits, recent studies show only 1% of Captive owners currently fund cyber-risks through their captives. Set against a back drop of increased Risk Manager and even board level concern about these risks we would expect to see this number increase sharply in the next few years.
Protecting supply chains
Modern businesses operate in a truly global marketplace. Today’s companies are very likely to have elements of their supply chain operating internationally. This can create complex webs of exposure, penetrating down to multiple levels of a supply chain and spanning various geographical locations. For even the more established corporation, this can be extremely difficult to map.
Supply chain risk therefore suffers from similar challenges to other emerging risks, due to a lack of key data. Again, if an insurer does not have the information to allow them to understand a particular risk, then they are likely to respond with caution, both in terms of capacity and pricing.
It is vitally important to choose a Captive servicing team with the tools and expertise to help collect and analyse that all-important data. By financing risks through a Captive, companies can begin analysing their risks in a much more meaningful way, to help build a more accurate picture of their specific exposures.
Insurers love certainty. So the more accurate picture you can have around your exposures, and the more data you can show to back that up, then the more likely you are to get terms that accurately reflect your risk; not terms based on general assumptions or uncertain information.
Realising the potential of Captives
Global corporate organisations require risk transfer across various geographical locations, and many jurisdictions will require a locally authorised insurer to issue insurance policies. For a business to license their Captives as a direct insurer in all of these locations would be a very cost-intensive process, and potentially outweigh any benefits.
Therefore, most Captive structures writing global exposures are now established as ‘Captive reinsurance cessions’. This is where an insurer ‘fronts’ the Captive, using its existing status as a direct insurance provider to issue policies. The insurer then transfers the risk to the customer’s Captive reinsurer.
In this and other ways Captive solutions can allow customers to take control of emerging risks, and improve their future attractiveness to traditional insurance markets.
Owen Williams is Head of Captive Services at Zurich Global Corporate UK
Owen Williams - Zurich
“Despite these benefits, only 1% of Captive owners currently fund cyber-risks through their captives.”
“Insurers love certainty. So the more accurate picture you can have around your exposures, and the more data you can show to back that up, then the more likely you are to get terms that accurately reflect your risk.”