Captives and reinsurers can team up to manage cyber risk

Captives and reinsurers can work together to manage cyber risk, according to Steven Bauman, head of global programmes and captive practice for North America at AXA XL.

In a VCIA conference session in Vermont this week discussing tactics for captives negotiating with reinsurers, Bauman said: “Captives have always been about emerging risks and emerging regions, but reinsurance plays a big part in that.”

Captives should work with reinsurers to manage cyber risk, he said.

Collaboration means the captive doesn’t have to deal with cyber alone, allowing it to increase its share of the risk gradually, getting more premium as it became more comfortable with the risk, said Bauman. Captives are better off starting with a conservative risk tolerance and increasing risk appetite as they get more comfortable, he added.

Considering the different models available for captives and reinsurers to share risk, Sean Logan, chairman of Annapolis Consulting Group, likened quota share arrangements to dividing risk using vertical slices, with the two sides sharing each tranche of risk. Excess of loss arrangements on the other hand involve horizontal slices, where each takes a different risk tranche, he said.

Salvatore Sama, head of US professional lines at Swiss Re, said quota share was more like a partnership between the two sides, whereas excess of loss could be more suitable for larger claims.

Whichever model captives chose, Bauman said captives will get increasing value from their relationships with reinsurers. “Now that prices are firming the reinsurance partnerships that captives have built up for years will start to pay off,” he said.

Logan also advised captives to always have a plan for how they will exit the business. This does not mean considering the end of the business, he said, but can be a form of renewal. “It can be novation, loss portfolio transfer, buying reinsurance to reduce risk. It can be about getting rid of legacy risk to to improve cashflow or underwriting going forward,” he said.