1 November 2022ArticleAnalysis

Beating the market

“RE–PAID has been designed to keep the process as simple as possible.”

Andy Jeckells, co-CEO, I-RE

As insured businesses continue to feel the pain and pressure from the hard market, they are looking for ways to offset what appears to be ever-increasing rates and diminished appetite from the market.Although the trend of premium increases crosses all lines (with perhaps the exception of workers’ compensation), few classes have been hit as hard as the US property market.Brokers and insureds are looking for answers, so it’s important to take a step back and look at some of the causes for the current market condition, an insured’s inability to combat the challenges, the historical limitations of captive insurance arrangements, and potential innovative solutions that may now exist in the market.

Current state of the property market

Climate change is real and is causing increasingly unpredictable weather events. With 2021 ending as a record year for extreme weather events insureds should expect to see an increase in renewal premiums as insurers look to make up for unanticipated underwriting losses.A derecho in Iowa, freezing in Texas, fires in the Pacific Northwest, and tornadoes through Kentucky and Tennessee are all excellent examples of the reality of unpredictability of extreme weather. To make the situation even more challenging the National Oceanic and Atmospheric Administration is predicting above-average activity for the 2022 Atlantic hurricane season.Supply chains continue to be negatively impacted by the COVID-19 pandemic as the needs of increased demand have not been able to be met due to a slowdown in production, from both materials and labour perspectives. Rising property values and the impact of inflation are exacerbating the issue, as loss costs skyrocket due to delays in construction and rebuild times.These and other factors contribute to carrier decisions to exit the market, reduce available capacity, and require increasingly significant insured retentions.

Traditional market solutions

Insureds that are in the guaranteed cost market generally have limited tools available to them to help control their premium spend. These are largely limited to taking on increased insured retentions or reducing the total amount of coverage they buy. But insurance requirements within lending agreements often limit maximum deductibles and dictate minimum limits, so these potential options may be limited or eliminated.Where insurance requirements are not a concern, insureds and their brokers are faced with the limitation of market appetite to provide higher retentions—which is typically even more restricted than appetite in the general market. Assuming there is appetite, there are also financial considerations. The insured must determine if the premium savings offered are worth the exposure the insured business will retain, in addition to any collateral requirements that the carrier may impose.

Historic captive insurance solutions

In use by thousands of US small and mid-sized companies, captives are routinely used as a method to retain risk and reduce net premium spend for high-performing insureds. Over the past several years the hard market has resulted in a significant increased interest in captive insurance arrangements to close gaps in coverage, overcome the lack of market capacity, and reduce costs of coverage.Unless they are used by large/global enterprises, captives (as versatile as they may be) have historically been quite limited in their ability to provide viable solutions for property coverages.If contractual obligations captives are not a concern, captives would typically look to underwrite a deductible reimbursement policy (DRP). In these scenarios the insured obtains a high-retention option from the commercial market to reduce premium spend. The insured would then pay its captive a premium for its DRP to transfer the risk of the high retention from the business to the captive. This formal transfer of risk can be a cost-efficient way of pre-funding for losses within the deductible with captive premiums, and to help the insured smooth the cash flow challenges related to the typically unpredictable nature of property losses.Even though the captive is the beneficiary of investment income and net underwriting profit, the insured often ends up paying more upfront premium under this arrangement than it would in the standard market. Although the premium paid to the captive for the DRP is partially offset by the savings of the premium credit for the high retention, the premium for the DRP will also include the operating costs for the captive, a risk margin, and expected costs for losses for the insured retention under the standard market policy.Unfortunately, the integration of a captive into a transaction does not eliminate the need to adhere to insurance requirements inside lender contracts. The maximum deductible allowed under these contracts can be quite low, so captives can look to obtain a fronted DRP from an AM Best A rated carrier—which typically satisfies the contractual requirements.As fronting arrangements are not free, the insured often must be sizeable to warrant a premium large enough to cover expected losses, expenses for the captive, and the policy acquisition expenses related to the fronting paper. This structure can present challenges from a collateral perspective as well as additional collateral most certainly required by the fronting carrier.This increased security (often required to the aggregate limit of a captive’s retention) would be in addition to any collateral obligations the insured may have to the insurer that has provided them the high retention policy.

RE-PAID: the solution for property

The good news is that there is now a true captive insurance solution to help with the challenges presented by the current property market. I–RE, the captive specialist insurance and reinsurance managing general underwriter, announced on July 1, 2022 that its RE–PAID programme had been expanded to include property coverage.With a model dedicated entirely towards empowering high-performing mid-market business owners to take risk and earn reward, RE–PAID specifically targets businesses that have built their success around a strong set of values, a sustainable culture of risk management, and a long-term mindset for ownership and a desire to retain risk and control.With the addition of property coverage to the RE–PAID programme, which includes workers’ comp, general liability and auto, high-performing mid-market businesses now have access to the same tools and ability to retain risk and premium that global enterprises have had in the US since the 1950s.RE–PAID has been designed to keep the process as simple as possible, reducing or eliminating almost all the hurdles these businesses face in using a captive.Keeping it business as usualWorking with an insured’s licensed property and casualty broker, I–RE underwrites a standard, guaranteed cost insurance policy. By designing polices to mirror existing deductibles, policy language, market rate premium, and issued on behalf of A rated AM Best carriers, the insured can obtain coverage that adheres to the insurance requirements outlined in their contracts.As brokers continue to provide coverage advice and service to the insureds, they have the flexibility to be compensated on an industry strand commission basis, or under a fee agreement direct with the insured—whichever is preferable.Captive participationSimultaneously with getting the quote for the standard A rated policy, the insured is presented with multiple options for retaining risk within a captive. The risk is transferred via a reinsurance agreement, so the transaction is not reflected on certificates of insurance. Retention options include occurrence and aggregate stop-loss limits (to protect the captive from catastrophic losses) as well as in-built tail liability closure.With risk ceded to individual captives, and not a group structure, insureds are able to utilise an existing captive or use their desired captive manager for the formation and management of a new entity. Collateral obligations for the programme are highly cost-efficient and are based upon the ceded reinsurance premium rather than exposures—eliminating the need for stacking gap collateral.Getting RE–PAIDAs the captive is now taking part of the risk, it receives a significant portion of the insurance premiums for the underwritten policy(ies), as much as 50 percent. Having become a reinsurer of the rated insurer, the insured (via its captive) also gains a much greater influence over the claims process.With the ability to play a more decisive role in handling, defending and settling of claims (influence the appointment of specialist lawyers, and have a say on which claims to settle and which to defend), insureds are in a position where they have a real ability to mitigate and reduce the cost of loss.And as RE–PAID isn’t a group captive, the insured is able to select the domicile, its captive service providers, investment managers, banking relationships, and determine when to make dividend/distribution requests.I–RE understands the difficulties in building a great business and is committed to providing innovative solutions to overcome the insurance system that handicaps the efforts and investments of successful business owners. With minimum premiums of only $250,000, high-performing mid-market businesses are finally able to participate in the risk and premium of their property and casualty coverages by using a captive that they wholly own and control.This simple, turnkey approach levels the playing field and provides competitive advantages that simply didn’t exist in the market before.