Operate with a hard market mentality at all times: CICA captive strategies panel

15-05-2020

Operate with a hard market mentality at all times: CICA captive strategies panel

CICA

“Captives should structure, domicile and operate with a hard market mentality at all times, and take advantage of softening when they can,” according to Peter Rosiere, a vice president of risk management at Sodexo.

Speaking on a Captive Insurance Companies Association (CICA) webinar titled “Captive Strategies in a Hardening Market”, that would have been a panel at CICA’s annual conference in California in March, Rosiere warned his audience about the challenges of a hard market which, he noted, many people active in the industry today have never experienced.

“Those who have some experience of these market conditions will do well,” Rosiere predicted.

He stressed that the environment will put many established relationships under considerable pressure. “You find out who your friends are,” he said.

Rosiere advised captives owners to be prepared to regularly review relationships and strategies. “Old relationships and strategies may no longer work,” he said. “Everything should always be in play.”

He advised captives owners and managers always to think on a multi-year time horizon, and reminded managers that they were in the business of selling their risk. Captives should spend time ensuring their proposals are comprehensive and well organised, so they stand out to potential buyers, he said.

“You are asking an underwriter to invest in your risk,” he explained. “When negotiating, you need to have more intelligence than the other side of the table.” 

Tech advantage

Technology has given captives the tools to think about risk in new ways that stand them in good stead in the evolving market, improving their ability to analyse and understand data, noted Ward Ching, managing director at Aon Global Risk Consulting. This should help mitigate some of the challenges captives will face going forward.

In particular, captives should analyse the relationships between the different forms of risk in their business, constructing and retaining diversified risk portfolios that have low volatility, Ching said. 

Meanwhile, Chris Mandel, a director and senior vice president at the Sedgwick Institute, argued that technological disruption in the insurance market presents a considerable opportunity for captives.

Since 2014, $20 billion has flowed into insurtech, he said, with 393 entities created in the risk management space specifically—more than any other area—representing around $3 billion of that investment. The next biggest area was health insurance, which attracted startups, although it is a larger investment by value, at $4.8 billion.

Such innovation allows captives to take more risk, said Mandel, making them more profitable, typically by giving them greater control and more predictability around spending.

Mandel admitted it is impossible to predict how the insurance market will react to the COVID-19 crisis, and to the trillions of dollars being poured into the global economy by central banks and governments. “The market could go back to where it was in the 1930s,” he warned.

The crisis could have lasting implications for many insurance lines, he said. The increasing number of employees working from home has raised questions about what activities are covered by workers’ compensation policies, for example, which have not yet been answered.

However, captives look well placed to navigate these challenges, which could help stabilise the broader insurance industry.

“When captives are profitable the market remembers and shifts to become more flexible,” said Mandel. That includes commercial insurers and reinsurers, which compete to win back business, he noted.

While market capacity is likely to present a challenge to captives managers looking to sell risk for the foreseeable future, this impact is being offset to some extent by reductions in expenses, said Rosiere, due to the operational impact of the pandemic and the resulting economic shutdown.

Peter Rosiere, Sodexo, Captive Insurance Companies Association, CICA, Ward Ching, Aon Global Risk Consulting, Chris Mandel, Sedgwick Institute

Captive International