5 Alternative Risk Transfer developments to watch in 2020

A pharmaceutical company wants to manage its product liability exposure more efficiently, because of increased market complexities. A multinational construction company is concerned about runaway premiums around exposures like cost overruns, liquidated damages and weather delays. A power-generation company operating a windfarm is concerned wind patterns may change and seeks coverage in case wind speeds diminish in order to achieve better financing terms. 

These are just a few examples of companies that might seek bespoke solutions in addition to or in replacement of traditional insurance to provide “fringe”-type or supplemental coverages like extended business interruption (BI), loss of profit following BI, cost overruns, delay in start-up and weather-related BI.

ART solutions can help companies in several key ways: self-financing atypical risks; transferring non-traditional risks; accessing alternative forms of capital; and bringing multiple lines of coverage into a single, multi-year contract. They are also attractive for companies impacted by reduced earnings due to specific non-damage events like political violence or terrorism where business is interrupted, but not by traditional events like fire or flood. Given this booming market, AGCS experts have highlighted five key trends in the ART space.

At AGCS, ART accounted for 20% of the gross written premium of €8.2bn in 2018 and is only projected to grow.

What is driving the growth of ART business? Firstly, a hardening insurance market is encouraging businesses to seek more bespoke approaches as they look for efficiencies in terms of risk transfer spend versus increased risk retention and this trend is expected to continue.  Most commentators agree that the past couple of years have  seen the beginnings of  such conditions globally, particularly for general liability, professional liability, errors and omissions (E&O), directors and officers (D&O) and financial lines, which saw nearly 10% global growth in 2018, and even in property lines, which saw 8% growth in rates globally in the same time period. Deloitte [1] predicts almost a 3% increase in property and casualty (P&C) premiums for full-year 2019 continuing into 2020, above the 10-year average of 2%, with less growth in established markets but up to 7% growth in emerging markets. Such conditions clearly help attract more buyers to ART solutions as companies seek self-managed risk management efficiencies, which allow for tailored products for multi-year and multi-line cover spread over time and across a company’s portfolio.

More companies want self-retention programs, as they start to rethink their risk approach, says Christof Bentele, Alternative Risk Transfer Head of Global Client Management at AGCS, even if they’re not buying yet. “With more appetite and an alternative way of approaching risk management, the number of interested clients goes up. This flexibility is key to driving ART growth.“ Secondly, capital/structural efficiencies allow companies to free-up capital for investment for allocation to other parts of the insurance program or general portfolio. But it is not just about efficiencies, according to Bentele, as much as it is about ease of operations.

Finally, ease of claims settlement is also driving growth in ART. Claims handling for multinational companies is improved in a global program, which allows for local claims experience and service while taking advantage of a global network. All of these efficiencies, in more competitive market conditions, have and will continue to impact the rapid growth of ART solutions.

In a hardening insurance market, depending on the scenario, companies can manage exposures more intelligently from a non-siloed, profit and loss (P&L) perspective across multiple lines than with the traditional approach of managing risk differently from line-to-line. This solution is ideal for large, multinational companies with increasing complexities in their set-up.

For example, a pharmaceutical company that wants to more efficiently manage its product liability exposure, which becomes increasingly complex every year, and needs a customized solution to complement traditional insurance. Consultations with an ART insurer results in a custom program that blends risk financing and risk transfer over a multi-year period, giving the company vertical protection with ample capacity and coverage terms, limits and rates locked in over multiple years. “CFOs and treasurers tend to think in holistic, multiline solutions, so risk managers are taking note”, says Bentele. “This approach gives companies an opportunity to create more risk management efficiency.” 

A good example of a holistic approach are certain loss-sensitive covers such as trucking companies with significant theft, accident and negligence exposures that can be mitigated – and premium saved – by, for example, installing in-cab cameras and buzzers to alert drivers when they start to drift off while driving. The company manages the risk based on its performance and works with return premiums and additional premiums to balance the result over a longer period, like three or five years. Other types of companies benefiting from this set-up might be those with pollution, crime or commercial auto exposures.

“These ‘swing’ solutions – so called because premium costs or savings can move back and forth depending on performance –”, Bentele explains, “are increasingly popular in a hardening market as they help smoothen the risk P&L and make the program less volatile with regard to premium spend. “In summary, it’s about how a company is going to put their capital to work. Structured programs like these are very popular across most industries, because of their flexibility and built-in efficiency.”

Structured program solutions consist of multiline policies combining traditional P&C coverages with others, including additional products like financial lines, transit risks and cyber exposures. Companies with diversified risk portfolios can best benefit from a structured program because spreading limits across various lines is more efficient if each line bears a substantial premium volume. The policies utilize customized wordings, developed by the company and insurer to meet specific business needs, and a global aggregate limit to provide better limits management.

”The increasing sophistication of customers’ risk management approach to their use of captives along with their drive to increase global program efficiencies has prompted fronting insurers to respond accordingly”, says Brian McNamara, Regional Head of Global Fronting North America at AGCS.  

AGCS’s structured fronting solution is a multinational program which provides multi-year protection (where permitted locally) and subject to ‘replenishment’ of limit provisions to prevent mounting year-on-year exposure. It can also make judicious use of a financial interest clause on the master policy, which enables the parent company to recoup its losses occurring in territories where coverage is limited or not available, and such losses have negatively impacted the parent company’s balance sheet.

The structured fronting approach allows companies to manage and control an aggregated retention across multiple territories and lines of business, while achieving contract certainty and ensuring compliance with all local regulations. Because of the cap on the global aggregate limit offered, it also has the advantage of reducing the insurer’s credit exposure, consequently reducing the level of collateral the customer is required to provide. In terms of efficiency, the structured fronting program also reduces administration and cost due to the reduction in the number of policies issued as a result of the multiline approach.

Historically, the administration of multinational programs has been somewhat cumbersome and beset by manual processes requiring insurers to fund the premium from a central treasury. Insurers are responding with a greater use of technology like block-chain coupled with global insurance networks.

Companies are demanding ‘real-time’ data on their program in terms of the movement of premium, status of claims and policy issuance. Insurers are responding with increasingly sophisticated client portals, which allow customers access to this data and enables them to extract it into customized reports. The customer is also provided with the facility of downloading all their global policy documents from the portal.

Many Fortune 500 company’s multinational programs have premium volumes in the range of $20mn to $100mn – expeditious premium transfer is crucial. Insurers provide ‘cash flow guarantees’ which govern the time taken to move the premium to the captive from the local territory’s insurer. These guarantees can range anywhere from 24 hours to 20 days depending on the level of premiums and territories involved.

Over the past decade, it’s alternative capital has increased 410% globally from $19bn in 2008 to over $100bn in 2020, in contrast to a 50% growth in traditional insurance capital over the same time period. It now accounts for more available global reinsurance capital than traditional funding sources– 16% in 2018, compared to only 6% in 2008 [4].

At its core, ILS is the transformation of insurance risk into a format suitable for capital markets investors.  ILS was initially founded on property catastrophe insurance risk. Key trends in the ILS space that will have broader impacts on the insurance market as a whole are: the continued movement of capital closer to the original risk source and the diversification of appetite beyond property catastrophe risk.

In the search for more and better ways to deploy capital, alternative capital has exploring new avenues through the selective deployment of capacity into insurance business (as opposed to reinsurance or retro) and non-property catastrophe risks (such as cyber).  The deployment of capital in these new ways increases overall market capacity and helps transfer catastrophic risks off insurer’s balance sheets freeing them up to deploy more or more meaningful capacity to insureds. 

Richard Boyd, Global Head of Capital Solutions at AGCS says, ”As these trends continue to play out, they will continue to drive disruptive change through the industry to the benefit of the customer.”