Alexandra Gedge, Marsh Captive Solutions
Ride-hailing apps changed the taxi industry; streaming services changed the music industry; food-delivery apps changed how we eat. These shifts have had a profound impact on the ways businesses use insurance, which has created opportunities for captives, says Marsh’s Alexandra Gedge.
In the face of change, one thing that remains constant is businesses’ need for protection from unexpected loss. By minimising financial impacts they allow for a return to business as usual as quickly as possible.
While commercial insurers are adapting, it takes time to develop products. It is unlikely that emerging needs will be met entirely by the commercial market, meaning businesses will likely be forced to retain risk whether or not they want to.
A captive provides a mechanism to manage the uncertainty and volatility often associated with new risks. They give owners the ability to formally pre-fund for losses where commercial insurance is unavailable or uneconomical.
“A captive can often respond more quickly than the commercial market in adapting to insurance needs stemming from new technologies.”
They also allow businesses to tailor policy wording to meet their unique needs, and to respond quickly when a loss occurs, while also gathering data and insight on risks and exposures.
Risk managers are increasingly looking to captives and alternative risk transfer options, presenting an opportunity to explore emerging technology risks to businesses for whom insurance solutions are not available.
Captive regulators are already noting the impact of this activity: in Marsh’s 2020 Landscape Report many global regulators named cyber as the top new risk they are seeing captives write more frequently.
Insurance solutions and captives
The first cyber policy created in 1997—a security liability policy—looks very different from what is available in the commercial insurance market today. Cyber risk can be challenging for organisations to address given the scale, complexity and rapid evolution of technology.
Cyber insurance also presents complexity in that there can be differences in coverages, in coverage triggers, and in how policies interact with other coverages between insurers or even between policy years.
The constant is that cyber remains an important business risk, so businesses still need adequate cover. A captive can often be in a better position to respond to the specific needs of businesses.
A captive can often respond more quickly than the commercial market in adapting to insurance needs stemming from new technologies.
Consider the liability in the event of an accident involving a self-driving car, or the need for coverage for ride-hailing apps where drivers are awaiting a client, thus driving neither as a private citizen nor as a paid employee. Challenges and anomalies will continue to arise across many new technologies, where the insurance market may not have yet developed a product to insure against losses for these new risks.
A captive can respond specifically to the needs of the parent company and is not restricted in the same way as traditional insurers. As such, businesses can insure their technology risks based upon their exposure and need not await support from third parties.
A captive can be tailored to the specific needs of a business. In the Marsh 2020 Captive Landscape Report, 43 percent of captive owners surveyed referenced the ability to “design and manuscript own policy form” as a key value driver from owning a captive.
Some business risks may not be insurable in the traditional market because they are so new, or there could be limited scope. There have been instances where a cyber insurance policy would exclude damage to property as a result of a cyber attack, yet property damage policies would not include damage due to cyber. Captives can fill such gaps if there is a sufficient risk exposure for the parent.
Particularly at a time when insurance markets are transitioning, there may be limited appetite among commercial insurers to broaden coverage beyond well understood exposures. New technology can be seen as an unknown, making it easy for insurers to decline coverage.
This leaves businesses exposed to emerging technology risks with limited scope of cover. Fortunately, a captive can be flexible enough to insure genuine risks to businesses, and captive managers can be on hand to support with actuaries or modelling to explore options to tailor-make policy wording for a captive owner.
A captive must follow arm’s-length pricing rules: premium should be benchmarked and derived from commercial market pricing appropriate for the level of risk.
As seen in Figure 1, global insurance prices have, on average, increased every quarter since the end of 2017.
If a business can self-insure a level of the risk, this first reduces reliance on commercial insurance and insulates it from large external premium increases. It also offers the opportunity to retain underwriting profit and generate surplus capital in the captive.
The captive can then further benefit the business through, for example: releasing the dividends to the parent company; offering the parent a premium discount (based upon a good loss experience); or providing funding for risk management operations.
An important challenge businesses face in assessing exposures and potential impacts of new technology is the lack of credible data. This may seem counterintuitive, as technology is so central to obtaining good, usable data, but when new risks emerge businesses often find it difficult to know exactly what the risk and insurance ramifications are.
Moreover, with limited data traditional insurers are faced with an issue of limited information on a risk or how it performs. This makes it difficult for tech firms to engage with markets and find insurance coverage.
A captive can be used to incubate risk, which will support data collection. This data can then be used to demonstrate underwriting performance, and can be shared with, or transferred to, the commercial insurance market.
Alexandra Gedge is a business development and captives executive at Marsh Captive Solutions. She can be contacted at: Alexandra.firstname.lastname@example.org
Alexandra Gedge, Marsh Captive Solutions