1 January 1970Actuarial & underwriting

Reinsurers drawn to supply chain risk

Reinsurance captives participate in insurance programmes on either a net cession or a gross cession basis. Within the global insurance and reinsurance market, there is a huge volume of captive business available. According to estimates by Marsh, the captive gross written premium market volume for property and casualty business was in the range of $55 to $60 billion, according to figures published in its Global Benchmarking Report of 2008. Furthermore, Marsh believes that 41 percent of all active captives globally buy retrocession cover in the international market.

One example for a further increase of captive retrocessions could be the risks associated with supply chain exposure of internationally operating companies. Support from reinsurers for taking on a proportion of a captive’s supply chain insurance risk is currently limited to a few examples. However, the need for supply chain insurance capacity for large international companies is growing, as demonstrated by experience following the 2011 natural catastrophe events in the Asia- Pacific region. It is based on a more holistic approach towards risk management within the captive and its parent company that brings together client, insurer and reinsurer who can together work closely to capture opportunities. This could well become a new trend.

Client demand grows

Supply chain resilience is vital for global businesses. Organisations face the prospect of dealing with increasingly complex supply chains, which necessitates stronger resilience to a broader range of risks.

Large multinational companies generally request considerable insurance supply chain limits per named suppliers and supplies. A tailor-made supply chain solution will comprise a risk and financial assessment of the supply chains they wish to evaluate or insure. The performance of a risk grading process allows insurers to translate company’s risk assessment data into the scores and information required as part of the insurer’s underwriting process and pricing models.

Various complex items need to be aligned by insurers and their clients, including levels of cover, insurance policy services, principal exclusions and claims management services. The involvement of reinsurance captives very often helps in finding solutions for unsolved insurance, capacity or wording requirements. Furthermore, thanks to captives, clients gain access to a broad international reinsurance market. Future success stories will certainly demonstrate the benefits of such an approach where clients, insurers, captives and retrocessional partners enter into a successful collaboration.

Multiple benefits

Organisations can reap multiple benefits by taking into account reinsurance and retrocessional coverage. Supply chain solutions will probably become easier to implement by integrating them into reinsurance captives in order to increase the diversification within the captive and manage principal exclusions and required customer retention limits. Bringing supply chain insurance into the captive also enables a deeper understanding of risk and more effective risk management education focusing on strategic significance in terms of business efficiency and continuity.

"With supply chain insurance in its captive, an organisation can re-allocate profit generated on other lines to supply chain risks so that it has a more efficient portfolio-based capital allocation."

By involving a retrocessionaire behind the captive, the captive can securitise a larger share of its supply chain risk and capture the potential to mitigate them. If a business needs additional supply chain risk transfer capacity in order to cover additional risk exposure, then using the captive to access the international reinsurance market is a logical step. This opens the door not only to additional reinsurance capacity, but also to opportunities to stabilise potentially high reinsurance premium fluctuations, especially in hard market cycles.

New opportunities for traditional reinsurers

Reinsurers traditionally take on highly exposed risks with low expected frequency, rather than more volatile risks. The growing need for supply chain coverage across industries and regions around the globe allows reinsurers to follow the so-called portfolio approach.

Sharing risks with captive partners who are committed to increasing the quality of risk exposure on behalf of their affiliates will become an exciting opportunity for traditional reinsurance companies in the global market. Once a traditional reinsurer has established a business relationship with a captive, it is likely that further lines of business will follow.

Hence, those large reinsurers who are under growing pressure for fresh sources of premiums may look at supply chain risks held in captives as an opportunity to participate on a portfolio level in those risks.

Captives that are motivated to play an active role in the reinsurance and retrocessional market need to rely on professional reinsurance administration capabilities provided by the fronting insurer. A prerequisite for a captive is to have a fronting partner in place that runs global international insurance programme infrastructures with strong IT reinsurance systems.

A useful blueprint for reinsurers who are interested in supporting captives on the retrocessional level is the banking sector. Here, reinsurers support captives of banks in optimising their global insurance cover, for example, by encouraging the integration of bankers’ blanket bonds and professional indemnity programmes into a captive. The captive takes the majority of the volatile risks and transfers the surplus share to a reinsurer or panel of reinsurers. This ensures that banks may roll out regional insurance policies that meet local regulatory requirements. These are backed by a consistent, global claims management process, which helps them to demonstrate they meet minimum capital and risk management requirements as outlined by Basel II.

Benefits of a diversified portfolio

With the growing support of reinsurers to transfer risk, organisations are open to introducing supply chain insurance into their captives thanks to the commercial benefits it brings.

With supply chain insurance in its captive, an organisation can re-allocate profit generated on other lines to supply chain risks so that it has a more efficient portfolio-based capital allocation. And by securitising supply chain risks through reinsurance, the organisation can gain better supply chain deductible levels by leveraging the diversification effect of its captive’s cross-class aggregate.

Deeper insight in risk profiles

One of the major challenges facing global businesses is managing supply chain efficiency and avoiding incidents that can severely impact profits and long-term survival. Senior management needs to constantly and consistently report on supply chain risks and their potential impact on the business, especially as change can happen rapidly and unexpectedly.

The captive structure supports this goal by capturing extensive and detailed data on incidents, claims and premiums. Consistent and transparent information is carefully tracked and reported. This greater risk insight gives senior executives a deeper understanding of their organisation’s exposure to risk and where supply chain disruption is likely to occur, so they can make better-informed management decisions.

Shared benefits for all parties involved

If insurers, reinsurers and captives work together to manage supply chain risks, they add value to the relationship from which all parties can benefit. By this collaboration, clients and reinsurers both benefit from the insurer’s loss data and claims management expertise. The client is in better control of efforts to reduce business interruption by anticipating supply chain disruptions with greater certainty. And if the client is willing to participate in its own risks, it is likely that a traditional reinsurer is more confident in the customer’s business practices and is probably more motivated to provide greater capacity.

Dr Paul Wöhrmann is head of captive services for Europe, Asia-Pacific, Middle East and Latin America at Zurich Global Corporate. He can be contacted at: