10 August 2018Analysis

With unique and disruptive industries, captives can get there faster

Unique and emerging risks can make the traditional insurance industry nervous and slow to react, whereas captives can be faster to step in and provide coverage.

This was a theme of the discussion in the panel entitled, ‘Innovative Spotlight: Financing Unique Risk’, at the VCIA annual conference held in Burlington, Vermont. Speakers included: Bob Gagliardi, global director of captive management and US fronting at AIG Insurance Management Services; Timothy Herr, secretary of Recreation Risk Retention Group (RRRG); and Robert Walling, principal and consulting actuary at Pinnacle Actuarial Resources.

The panel looked at the ways captives can be used to finance unique risks, but there are still challenges in this, particularly in disruptive industries and from a pricing perspective.

“Captives get there faster,” said Walling. “Insurance companies can be slow to react, they want to see 10 or 20 years of data.”

Herr was involved in the creation RRRG in 2016 to insure the unique risks faced by the hang gliding and paragliding industry. He found that he couldn’t find suitable coverage through the traditional market and had no choice but to go down the captive route.

He represented the United States Hang Gliding and Paragliding Association for almost 30 years.

“They ended up three years and a month ago they wouldn’t be covered by their commercial specialty insurance anymore,” he said.

Herr added: “One problem we had is that we didn’t have a huge GWP. When you’re asking a carrier to take a risk of $1 million, they ask how many years till that’s covered by the premium. That’s a problem.”

Some of the other challenges in getting RRRG up and running was finding reinsurers willing to take the risk, and that even going to the reinsurance market was constrained by the perceptions of the hang gliding and paragliding industries.

Herr added that adventure races and obstacle course races also have significantly liability concerns.

Other examples of innovative coverages and industries captives can get involved in include the cannabis industry, renewable energy, and new technologies such as blockchain and bitcoin.

Gagliardi suggested there are liability issues around bitcoin, surrounding how they handle their E&O and cyber liability, and finding a fronting solution for these exchanges.

“The clients often know more than we do, they’re in a better position to take the risk,” said Gagliardi.