24 September 2020Actuarial & underwriting

Captives help ward off the four horsemen of the hardening market

Businesses are being visited by the four horsemen of the hardening market, according to Oliver Schofield, managing partner at RISCS and head of captive and alternative risk transfer at Principal Re.

Speaking at AIRMIC Fest 2020, Schofield said captives can help businesses ward off the danger posed by the horsemen, which he defined as: reduced capacity; increased premiums; increased retention requirements; and narrower coverage.

Captives can mitigate these dangers by stabilising pricing over the long term; reducing the cost of risk; tailoring wordings to ensure breadth of coverage; and offering parents a new profit centre, Schofield said.

Schofield pointed to a “cocktail of uncertainty” facing global businesses, of which the hardening market is just one ingredient, alongside the pandemic, political risk and trade wars.

He said captives can bring stability to businesses trying to deal with these challenges. “This is a great opportunity for captives to demonstrate lasting value to parents and the industry,” Schofield said.

He added: “Without doubt there has been a massive increase in awareness as to how a captive solution can bring stability.”

Schofield stressed that captives exist to complement commercial insurers, not fight against them, and advised all businesses to conduct a strategic risk review to get an accurate sense of their risk appetite.

Risk reviews should be treated as high priority, Schofield warned. Risk managers and finance officers often have a different view of how much risk a company should retain, he noted, and a strategic review can ensure a business has a coherent view.

Given the hardening market, businesses should focus on “must have” coverage, and identify the “nice to have” but ultimately unnecessary coverage that may have been added onto their policies during the soft market, he said.

By using captives, increasing retentions and using reinsurance where necessary, businesses can mitigate the impact of the hardening market, Schofield concluded.