Captive growth drives demand for alternative risk transfer: Beazley

Greater corporate risk retention is creating far larger role for alternative risk transfer as companies look for ways to manage exposures sitting within their captives.

That is according to Stefan Wunderlich, head of alternative risk transfer and parametric solutions at Beazley Bermuda, who sees the development against a backdrop of greater investment in risk management, prompted by volatility across areas including supply chains, procurement and climate. As companies become more sophisticated in understanding those exposures, some are also choosing to retain more of them.

“What we’re seeing is that a lot of premium is being put into these corporate risk management vehicles, i.e. captives. That’s an important market observation and a key reason as to why alternative risk transfer solutions are a more frequently used tool by corporate captive managers,” Wunderlich told Bermuda:Re+ILS ahead of the ILS Bermuda Convergence taking place on 12-14 October. 

For Beazley, which is building its alternative risk transfer capabilities in Bermuda, that creates opportunities for structures ranging from parametric cover to multi-year, multi-line reinsurance programmes. And the proposition is stronger as part of Zurich, according to Wunderlich. “By combining our specialty insurance expertise with Zurich’s more than 35 years of global experience in captive fronting and alternative risk financing, we are amplifying what we offer clients. We now have greater scope to support clients in volatile or capacity-constrained markets, with the most appropriate structure shaped by what each client is seeking to achieve.”

And the objectives can differ. Alternative structures can provide cover for risks that have become difficult to insure conventionally, while other structures allow companies to retain a significant share of their exposure and transfer tail losses. “The corporates do commit to self-insure a significant retention. We offer structures with funding layers, where a corporate will pay into an account, which will absorb the first few losses to the captive layers, before the reinsurance kicks in,” he explained. If the loss experience is favourable, some or all money from the loss funds can be returned. “The ability to earn back the loss funds is a strong incentive for an elevated risk management culture,” he said.

Strategy over price

The appetite for that approach varies between corporate buyers. At one end are companies with established risk-management operations and experience using alternative structures over long periods. Wunderlich said some have been using similar structures for 10 or 15 years, with programmes structured across five-year terms. “These are sophisticated clients who buy very strategically, decoupled from the  volatile, commercial market ,” he said.

“They focus on stability, and stability over a longer term is more important to them than just optimising the momentarily available insurance budget.”

At the other end are buyers for whom alternative risk transfer is one option in a broader purchasing exercise. If the traditional insurance market can provide the required cover at an attractive price level, there is little reason for those companies to remain committed to an alternative structure.

Finding a home for difficult risks

Alternative risk transfer can also provide another route for exposures that are challenging to place conventionally, either because they have adverse loss experience or because the risks are new. Beazley pointed to marine as one example, particularly given the uncertainty created by geopolitical tensions. Rather than ask an insurer to take the exposure in its conventional form, a structure can be designed in which the corporate retains a greater share of losses and transfers more severe outcomes. Similarly, if a risk class is new, a captive protected by an alternative risk transfer structure can act as a risk incubator, where the new risk class is mixed with established risk classes and hence becomes palatable for insurers. 

“Even if they have unfavourable loss experience, such lines of business can be baked and managed with a high degree of risk sharing,” Wunderlich said.

Importantly, that does not necessarily mean the risk remains in an alternative structure indefinitely. “I think it is very interesting to use an alternative risk transfer vehicle to bring back a challenged line of business to the insurance market,” he said.

After several years, a programme can provide a clearer loss history, giving the buyer and insurers more information on how to assess the exposure. “You can bring it back into the conventional market if this is desired,” he said.

For captives, Wunderlich sees the ability to retain and manage increasing risks as a central opportunity. Alternative risk transfer does not have to replace traditional insurance, nor does a company have to transfer everything it can.

Instead, the structures allow sophisticated buyers to make more deliberate decisions about what sits within the captive, what is transferred to insurers and reinsurers and how that balance should change over time.

Why Bermuda

On the Bermudan market, Wunderlich said, “Bermuda’s well-established captive sector provides a strong foundation to help clients use captives more strategically, retain risk more efficiently, and develop tailored solutions for complex or emerging exposures that may be difficult to address through traditional insurance alone. And it creates an opportunity for clients to have greater control of risk.”

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