14 December 2016Actuarial & underwriting

Cyber looms on the road ahead

Cyber is featuring as more of a conversation point among many of our captive boards, but we’re not entirely sure that most risk managers have a full grasp of their cyber risk quantification as yet.

In our benchmarking studies and global risk management surveys in the last couple of years, cyber has continuously been in the top five risk exposures. The market is responding and underwriters are working hard to pull coverages together, but most risk managers are still struggling to identify where their cyber exposure begins—and, more important, where it ends.

At Aon we have a cyber risk quantification tool that should help our clients take a first step into the cyber coverage world, and should also help any risk manager going to the chief financial officer or board looking to consider writing cyber or increasing their net retention into cyber coverages.

Our job on the captives consulting side has been to try and help guide that conversation and get clients to a point where they’re comfortable, knowing precisely where their exposure is. The next stage of that conversation is to identify the price point and quality of the coverages available and to assess whether there is merit in the captive participating on any level of those coverages.

"While we’re having a decline in terms of run-off and consolidations of captives, we’re also seeing an increase, certainly in 2016, in new captive formations in the Cayman Islands."

We have seen some activity, but not to the level that we would have expected at this stage. I suspect that 2017 will see an increase in activity, especially with the soon-to-be-released Aon cyber capacity available only to Aon’s captives clients.

Every good risk manager will have a piece of paper in his or her desk to show that there is a cyber liability programme in place, but stepping it up and taking more skin in the game and more of a deductible within the captive is a different scheme of arrangement. Ultimately, as we go through renewals, we will see more activity.

Looking at the market as a whole over 2016 in terms of numbers of Cayman Islands captives, as in most other jurisdictions on a gross basis numbers continue to grow. On a net basis, however, after 40 years we are seeing some negative growth.

A lot of the insurance companies we’ve been managing are now mature insurance companies and sometimes their shelf life gets to a certain point where there is no further reason for them to remain in existence and their value proposition is no longer quite as relevant for the parent company.

Allied to that is the fact that we’re in a very soft market environment. Most industry experts would agree that because there’s so much surplus reinsurance capacity and capital in the market we now have a situation where at times there doesn’t need to be an alternative risk vehicle like a captive in place, so the captive and its management must work much harder to ensure it remains relevant as a risk management and risk financing tool.

However, that’s almost counterintuitive in such a soft market, because we are also seeing an increase in activity in terms of new formations. While we’re having a decline in terms of run-off and consolidations of captives, we’re also seeing an increase, certainly in 2016, in new captive formations in the Cayman Islands—we’re up about 35 this year.

Reasons for closure

As insurance managers in the Cayman Islands we’ve been looking at the reasoning behind some of the shut-downs. In some cases it’s been run-off, but in others it’s been consolidation in the US healthcare market as a result of the Affordable Care Act, which has led to very large hospital systems consolidating their position, making acquisitions and as a result of that acquiring facilities that already had a captive insurance company.

What we end up doing is almost merging two insurance entities, or shutting one down and bulking up the other. That has formed a major part of why we’ve seen some contraction in the healthcare space, and it again marks the Cayman Islands as a world leader as a healthcare jurisdiction; I think that it will continue to be such a leader.

A lot of our captive owners have looked at their captive as a traditional medical malpractice or hospital professional liability writer over time but now we’re looking to the C-suite and challenging them to see where else they can make the captive work for them within the organisation.

From a captive management perspective we are facing somewhat of a Jerry Maguire moment. Some captive management companies have commoditised their offering and there is significant competition particularly regarding price; many of us need to take stock of where our value proposition will be in the future.

The larger managers are tied in with greater resource and data and can bring a broader range and quality to the conversation and the smaller managers will focus on their independence and whether that works for them too.

As an industry, however, we are lacking in innovation. I admire in some respects the commerciality of some of the onshore jurisdictions but you also have to look at the infrastructure surrounding the captive. From that perspective the Cayman Islands has had a 40-year head start, yet some are very comfortable and are not looking around the corner at what is a changing industry. It’s time to take stock of our talent, our offering, our service, our energy and our vision.

Adrian Lynch is the managing director at Aon Risk Solutions. He can be contacted at: