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It is now more important than ever that resource projects approach their insurance/risk transfer partners in the same manner as they would with project financiers/investors.
Insurers are deploying their capital in a similar manner and are increasingly looking for green projects to invest in.”
Stephen Kerridge,
National Manager – Resources,
Lockton.
Insurers are increasingly looking to only partner with organizations in the resources sector with best-in-class ESG scores.
This thinking is driven predominantly by shareholder expectations and insurers’ increasing obligations to be good corporate citizens in the eyes of the public. For insurance buyers, this is impacting insurer appetite and the insurance market’s willingness to underwrite carbon-intensive risks and certain risk profiles. As insurers shy away from certain risks and in some cases, the entire sector, organizations need to future-proof their organization with a long-term, strategic approach to risk.
So how can organizations respond to increasing coverage gaps, forced exclusions, and other challenges in the short term?
Alternative risk transfer structures such as captives should be explored as a solution to insurance markets that may no longer exist in the future.
WHAT IS A CAPTIVE?
A captive is a licensed insurance company that is established to act as an insurer for its parent company and subsidiaries. Captives are a vehicle used by organizations wanting to pursue a long-term, strategic approach to risk. As part of a wider risk management program, a captive offers its owner more control and improved governance over its risk financing strategies. It provides a formalized framework and discipline to the funding of self-insured risks and wider access to reinsurance capacity for those risks it does not want to retain, smoothing volatility and resulting in a lower total cost of risk.
WHY RESOURCES COMPANIES ARE USING CAPTIVES:
FINANCIAL
- Reduced insurance spending and retention of underwriting profits.
Retaining risk in a captive that would otherwise be transferred to the insurance market can reduce premiums and prove to be more economical over time. This is particularly true of well-performing risks, allowing underwriting profits that would normally be lost to be retained. - Improved cash flow.
Monies that would have been paid out in premiums can be retained within the group and are accessible by the organization and generate investment income. - Receive Ceding Commission.
This is the fee paid by a reinsurance company to an insurance company to cover administration costs, underwriting, and business acquisition expenses
RISK AND INSURANCE
- Direct access to the reinsurance or alternative market.
As an insurance company, a captive can access the reinsurance market to cede risk outside the organization’s appetite. Reinsurance companies generally offer better premium rates and coverage options. - Cycle management and independence.
The ability to retain more risk provides greater independence from the commercial insurance market. Through a captive, an organization can choose to retain more or less risk depending on market cycles. - Funding of new and emerging risks.
A captive allows the organization to protect itself against risks that the insurance market is not willing to accept or that are prohibitively expensive to buy.
ORGANISATIONAL
- Formal mechanism of risk retention and control.
Premium and loss data is centralized through the captive which provides a formal measurement of an organization’s overall risk management performance. - Appropriate funding of risk retention.
A captive provides feedback on the effectiveness of the organization’s risk financing strategy. As the organization acquires more experience, it can adjust the captive’s retention limits and use of available capital. - Corporate governance considerations.
Captives facilitate more creative and customized coverage of risks. Increased risk retention can promote improved risk management behaviors within the entire organization.
HOW DO CAPTIVES WORK?
All organizations accept an element of their own risk using deductibles and insure everything above this level with commercial insurers. For many organizations, it can be more economical to retain a greater proportion of risk, reducing the amount and cost of insurance purchased commercially.
It is in this area of increased self-retained risk that a captive can provide an efficient, effective solution as a vehicle for organizations to formalize, retain and finance their risks. Many organizations often wonder what the difference is between traditional insurance and captives.
FINAL THOUGHTS
Ahead of insurance renewal, it’s important to educate your internal stakeholders on the power a captive can bring to your organization. It is a strategic investment that delivers additional benefits over the long term which are fully aligned with your risk financing strategy.
By Stephen Kerridge.