Closing the gap - Interview with Global Head of Alternative Risk Transfer (ART)

• To be successful in ART, you need expertise, imagination and relationships, and to bring it all together in a multi-disciplinary approach. You need high-caliber talent on all sides, the insurer, broker and the client, to make such deals happen. At AGCS, we are proud to have around 90 such expert professionals around the world, who have a strong local connection, but are part of a truly global team. 
  

• Grant Maxwell: We are certainly seeing clients becoming more sophisticated in their risk management and retaining more risk themselves. This leads to more opportunities to provide tailored solutions that complement the product offering we have across the rest of AGCS. More clients and brokers approach us to understand better how ART structures work and if they could be an option for their business. We recently offered a client seminar in Europe about virtual captives. There was strong interest from about a hundred clients, and they had well-informed and detailed questions about this risk financing vehicle. A few years ago this would have been very much niche topic for only a handful of risk managers.

• Grant Maxwell: Captive insurance use increased dramatically. Global Broker Marsh saw more than 100 formations of all types of captives in 2020 and there's no sign the trend is slowing down in 2021. More companies are evaluating the option of establishing a captive or putting dormant captives back to use. We also see other risk managers expanding existing programs – both in terms of higher volumes or new risks such as Cyber or D&O. In addition, they can increase retentions to show insurers they have trust in their risks and data or because lower layers are not available in the market. Others become more creative and keener to experiment, for example with cat bonds.
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• The hardening market will make it easier for risk managers to show the value of any captive structure to their CFO. The benefits are well-known: stable pricing, access to a higher level of capacity as well as to reinsurance and alternative capital markets and last but not least, a strong commitment to the insurance market to really have skin in the game by self-insuring a proportion of the risk.

Grant Maxwell: Supporting captives is a key focus are for us going forward. A large, multinational company with their own captive insurance program generally still benefits from certain services from insurance companies. Typically, captives don’t have the capital that insurance companies have, don’t have regulatory permissions for insurance transactions around the world or other infrastructure, services or partnerships that a big insurance company like AGCS can offer. The captive therefore often needs fronting services, where we do the operational work of issuing and managing the policies and premium payments, but the risk goes to the captive.

We can add on additional services like claims, risk consulting or underwriting for fees. Together with our clients, we design and continuously evolve the whole captive program and structure to be as effective and efficient as possible for us and the client.

We also provide structured reinsurance programs to captives. These are tailor-made to protect the captives against losses higher than their desired risk appetite and can be multi-year and/or multi-line. These can be combined with a fronting program, or on a standalone basis.

Grant Maxwell: A captive shouldn’t be thought about as a short term solution for a particular stage in the market cycle. It is a long-term commitment which requires capital, competencies, and capabilities. This won’t make sense in all cases. But there are other options indeed, particularly for smaller and mid-size companies.

So-called virtual captives offer similar benefits to standalone captive programs. These are basically multi-year insurance contracts that allow a certain amount of risk retention within the company while absorbing peak losses and at the same time containing mechanisms that allow a dynamic adjustment of premiums depending on the claims experience. Companies can achieve many of the risk financing benefits of a full-fledged captive, with a significantly lower capital and operational cost compared to that of setting up and managing a standalone captive.

We provide a range of non-traditional risk solutions for AGCS clients. We see continued opportunities to do that, the risk landscape is constantly evolving, and there will be opportunities to provide new products and non-traditional solutions. Consistent with the AGCS underwriting principles, ART is not looking to take general business risks or financial market risks, but there is still a whole spectrum of fortuitous risks that we can cover in a non-traditional way. 

Grant Maxwell: With the hardening market, we’ve seen clients retaining more risks themselves, and being more sophisticated about how they manage risk, as insurance is not the cheap option they may have had during the soft market. But I believe that ART solutions will stay relevant across the cycle. In that sense there are may be some parallels with work during the pandemic. People were forced to embrace tools like video conferencing and virtual collaboration, but now they see the benefits, some of that will remain in the new hybrid working environment.

I think clients taking a more sophisticated approach to risk management is also here to stay. For many companies, the approach to risk management will also be a hybrid one combining the best of both worlds, traditional risk transfer products and a risk financing approach though alternative solutions. The perfect client for us is one with whom we can have a transaction that evolves and stays relevant to them, being a win-win for both sides.