Dermot Finnerty of White Rock Group shines the spotlight on how changing market conditions are driving demand for risk retention (cell and captive) solutions.
There is a lot of speculation around re/insurance market conditions, tightening markets, and increased rates at the moment. One thing is certain: the market is changing, and with a changing market comes opportunity—if managed correctly.
Some carriers have withdrawn from particular lines of risk because of market conditions, increased costs of operations as a result of regulations, and losses and capacity restrictions. Buyers have been looking for alternatives to manage their total cost of risk.
To understand how this impacts the captive insurance and protective cell company (PCC) market, it’s important to understand the context in which these market changes are taking place.
Hardening conditions in context
White Rock, Aon’s Protected and Incorporated Cell Company Group, has seen significant growth and evolution in the last 23 years. It has expanded into seven locations, with the most recent being a new operation in Washington DC, thanks to growing demand for PCC solutions in this jurisdiction and around the world.
“It is essential that clients can align insurance decisions with their enterprise risk appetite, and accurately measure the volatility associated with their risk profile.”
White Rock pioneered the PCC concept in 1997, setting up the first PCC in Guernsey. Since then, White Rock has expanded its operation and now operates PCCs in Bermuda, Gibraltar, Guernsey, Isle of Man, Malta and Vermont. In total it manages 200 cells, circa $0.8 billion in gross written premium, and $1.4 billion in assets. White Rock has now managed close to 500 cells since its inception.
Enterprises make the strategic decision to use a cell structure for a number of different reasons. It can deliver more efficient fronting arrangements. Establishing retention cells provides a direct-writing, or a reinsurance facility, without the need to establish a separate company. It can be used as a run-off and warehousing solution and offers access to reinsurance markets. Finally, it is a turnkey solution to access insurance-linked securities (ILS) and collateralised reinsurance markets.
In particular, there has been considerable demand for ILS solutions in recent years, as the alternative risk transfer market continues to mature and grow, as a cost-effective entry point to the re/insurance market.
In more general terms, PCCs offer flexibility of usage, streamlined market access and significant capital and collateral efficiency, while ring-fencing assets and liabilities in a strong compliant environment. As such, PCCs offer an attractive choice to insurance buyers looking for alternatives.
Demand for solutions is increasing
Recent hardening re/insurance market conditions have driven demand for a number of the above solutions. Insurers have begun seeking increased rates, increasing deductibles, or reducing coverage. Once easily attainable coverage has, in some instances, become very difficult to obtain.
We have seen underwriting philosophies shift significantly in some places, leading to price increases that are sharpening buyers’ minds and encouraging them to look into new risk management structures.
Aon’s latest insurance market heat map revealed widespread rate increases across Europe. The majority of countries throughout Europe are seeing at least moderate increases of between 5 and 10 percent across most lines. Many more are experiencing high rate increases of more than 10 percent, particularly in lines such as D&O, professional indemnity, cyber, and property and business interruption.
These hardening market conditions come after the longest soft market that the global re/insurance sector has ever seen, with over 20 years of softening prices as the overriding trend.
This means that, for the first time, the younger generation of insurance practitioners faces a new conversation. The experience and knowledge of those who saw the last hard market is therefore crucial to help clients navigate the changes to come, whether or not these hard market conditions continue beyond 2020.
The last hard market attracted a lot of new capital, particularly in reinsurance. However, since then there has been significant consolidation among carriers, meaning this capacity has also consolidated.
Interest in cells in a PCC or other self-insurance structure has been driven by the speed they can be brought to market, which allows clients to act quickly in these conditions. In terms of geographies, the highest levels of interest in PCC structures are coming from Europe, North America, and Australasia.
New and emerging risks also drive demand
Beyond the hardening market, other drivers of increasing interest in PCC structures include socioeconomic changes. In Europe, the UK’s departure from the EU has encouraged many UK companies to establish European subsidiaries to ensure business continuity.
The ability to conduct cross-border business post-Brexit is also driving interest from small and medium-sized enterprise (SME) insurers in PCC solutions. We have seen interest from UK-based SME carriers which don’t have large enough European portfolios to justify creating a hub on the Continent.
At the same time, Solvency II has restricted growth at the lower end of the market. The introduction of the Solvency II regime in Europe has resulted in a significant increase in the overall cost of running an insurance company. And this change in solvency requirements has had a huge impact on interest in captives and PCC cells as alternative retention vehicles to support insurance risk in the EU.
The need to re/insure against new and emerging risks is another driver of demand for PCCs. Fast-evolving risks such as cyber, and changing legislation in terms of technology such as the EU General Data Protection Regulation are prompting buyers in some markets to look at alternative potential vehicles for risk management.
Cryptocurrency is another new area of interest for captives and PCCs, more so from North American markets than in Europe. Other recent changes in the medical sector, such as the legalisation of cannabis in North America, are leading to an increased interest in self-retention vehicles.
Meanwhile, the impacts of the devastating wildfires in Australia, California and some parts of Southern Europe are driving a lot of exclusions, prompting buyers to look for alternative reinsurance markets that might take these risks. The fact is that, despite wildfire exclusions, these businesses need to continue to operate, and therefore need insurance.
The same dynamics apply in the product recall market, where exclusions and tightening rates are driving insurance buyers to look into the other choices on offer. We are starting to see enquiries about supply chain risk, on the back of concerns over the novel coronavirus (Covid-19) in China, a territory that produces many of the world’s goods.
Since the last hard market, managing general agencies (MGAs) have become an integral part of the commercial side of the re/insurance business. We are seeing enquiries from MGAs and other delegated authority vehicles, including Lloyd’s coverholders, looking for other retention structures through White Rock.
Using all the tools in the insurance toolkit
Ultimately, the decision to explore alternatives, including self-insuring, is driven by the value for money that traditional re/insurance offers. Understanding the total cost of insurable risk is essential if carriers and insurance buyers are to make the strategic decision to explore alternative re/insurance platforms such as captives and PCCs.
Developing the tools that let clients make data-driven decisions around the benefits a PCC would bring has been essential to establishing the cost and efficiency savings behind the structure. These tools really come into their own in the current changing global market conditions.
To help clients decide which structure best suits them, Aon has developed the Risk Financing Decision Platform. This powerful analytics-driven framework helps organisations optimise their insurance programmes and manage volatility.
Providing an independent view of organisations’ ability to take risk, and how different options could maximise the efficiency of their insurance programme and optimise their insurance cost of risk, are vital insights for insurance buyers.
Total cost of risk
It is essential that clients can align insurance decisions with their enterprise risk appetite, and accurately measure the volatility associated with their risk profile. This provides a better understanding of the implication of alternative insurance programme options on their total cost of risk.
Offering such unique capabilities and innovative thinking is essential for supporting clients, as they may be forced to change their approach to re/insurance and risk management.
Choice is also crucial in the current hardening market conditions. All options should be on the table when reviewing insurance programmes. Captives, PCC structures and other alternative risk management platforms are key tools in the toolkit that support both insurance buyers and carriers themselves in continuing to grow and manage the risks they face as efficiently as possible.
The PCC and captives market is developing rapidly, and we at White Rock are forecasting more than 10 percent year-on-year growth for 2020, driven by a trio of factors: more stringent legislation around the world; strong demand for capacity; and demand for more price-efficient risk transfer structures.
Dermot Finnerty is managing director at White Rock Group. He can be contacted at: firstname.lastname@example.org
Dermot Finnerty, White Rock Group, Aon, Protective cell company