9 August 2018Analysis

Captives must be realistic about reinsurance

The reality of what reinsurance can do for a captive versus what some captive owners want can be very different things – it is important for owners to be realistic and take a measured approach to how they use reinsurance.

This was the consensus of a panel discussion called “The Changing Profile of Risk - How are the Reinsurance Markets Adapting?”, held at the VCIA annual conference in Burlington, Vermont. Speakers included Steven Bauman, head of global programs and captive practice at XL Catlin; Steve McElhiney, president at EWI Re; Daniel Meyer, senior vice president at Guy Carpenter; and Salvatore Sama, leader of development and advancement at Swiss Re’s US professional lines.

The panel explored how captives utilise reinsurance, what the advantages are, where it's most appropriate and also how some emerging risks like cyber fit in.

“When you use reinsurance in a captive, you must get it right,” said McElhiney. “You must never have uncollectible reinsurance.”

One of the big advantages captives can offer companies is access to the reinsurance markets, whether that is direct or through an intermediary - both have advantages and disadvantages.

There are varying degrees of how much reinsurance a captive might utilise. Retaining the first layer of risk is fairly safe and very predictable, there are no surprises on the balance sheet, with a 90-95 percent confidence level, Meyer noted.

Once the captive is more comfortable with a risk, they may start to look at assuming high layers of risk, add more tailored coverage, and eventually fully assume coverages and layers.

More captives, for example, are using reinsurance to cover their cyber risks large due to the tailored coverages a captive can offer.

“It’s rare that a month goes by that I don’t get an enquiry about putting cyber into a captive,” said Meyer.

Bauman suggested that captives should be more involved in cyber risk. He noted that there are hundreds, if not thousands of captives that have significant amounts of captives and surplus.

“The captive can use its own form to put these very customised coverages out there, that the corporate and the insureds know themselves,” said Bauman.

However, Meyer said there are a whole host of reasons as to why there isn’t much cyber in captives at the moment.

“If you are large single parent captive, you probably already have some cyber cover from traditional insurers,” he continued. “The other thing that people miss when putting cyber in a captive is the additional services that have to be administered when you do it.”

Examples of this include breach incident response, forensic claims consulting, ID protection, and corporate are probably going to want third parties who have these connections, he said.

McElhiney added: “When placing reinsurance in a captive, the more data you have, the more you can tailor it around your own experience over an industry class, the better.”

Bauman warned captive owners and managers to be cautious and always look at several different sources of data, using the term “garbage in, garbage out”, which is used to express the idea that poor quality input will always produce faulty output.