Using HART to navigate ‘hard’ insurance markets

Daphne Peter, Head of Alternate Risk Transfer at Hollard Insure

Leaders in risk management are encouraging South Africa’s large corporations to consider alternative risk transfer mechanisms to better manage their risks in the post-pandemic world. They argue that firms that are struggling to get adequate insurance coverage due to cost and lack of capacity will find significant benefits in cell captive insurance solutions.

The combined impact of hardening insurance rates and global capacity constraints following the pandemic has made it difficult for large firms to address all of their risk requirements in the traditional insurance market. The insurer believes cell captive insurance solutions may be the answer for firms that are keen to improve their access to global insurance markets and share in the profits emanating from disciplined risk management and underwriting practices, over time.

Cell captives have been around for a long time but are back in favor following multiple years of poor loss experiences among leading insurers and reinsurers. As traditional insurers adjust their books for pandemic-related losses and reprice for sharp rises in the frequency and severity of certain insurance lines, firms are often left wondering how to afford 40-50% surges in the premiums payable for sections of insurance cover. Firms in certain industries such as mining and manufacturing are struggling to secure competitive rates for assets or liability cover despite having no claims in the prior year and agreeing to much larger deductibles. These firms end up shouldering a greater share of their risk without any pricing benefit.

The shortage of insurance and reinsurance capacity is of even greater concern. Many local insurers are reluctant to provide ongoing cover for commercial fire risks due to poor claims experience in the period from 2017 to 2020… Limited capacity and the risk management requirements for certified sprinklers are leaving risk managers and executive teams at large firms little choice but to go the uninsured route, or to find other ways of meeting their corporate governance requirements insofar risk goes. Company boards are turning to cell captive insurance solutions because it offers them greater flexibility in risk retention (self-insurance) versus risk transfer to insurance and reinsurance carriers and makes them less exposed to the fortunes of the global insurance and reinsurance markets.

Cell captive insurance solutions involve a firm entering into an agreement with a cell captive insurer to run their insurance activities within a cell structure. Firms must fund their risk transfer activities within the cell structure through a combination of capital and reinsurance arrangements. The cell structure allows firms to access global reinsurance markets to equalise insurance costs across the organisation’s operational footprint; participate alongside their insurance partner in underwriting profits and build up capital reserves for future risk events.

Cell captive insurance solutions are also useful in industries where traditional insurers do not have enough data or experience to accurately price / underwrite risk. A firm that is pushing the innovation and technology boundary is often at a distinct disadvantage when it comes to insurance, because insurers may refuse cover or charge high premiums based on poor or little information. Such firms use a cell structure to provide cover for uninsurable or expensive-to-cover risks.

Cell captive insurance solutions present opportunities for insurance brokers to expand their businesses into the fee-based risk advice segment. We rely on our corporate insurance brokers to introduce businesses to us; they then take an active and ongoing role in advising their clients on the establishment and utilisation of the cell captive insurance solution in transferring risk. This is not a quick-fix solution. Firms need a strong balance sheet to fund the solution and need to commit to the solution for several years.

If you have good risk management processes in place, and you truly understand your risk, then the cell captive structure offers an ideal way to influence your future pay-away premium and build retention and capacity.

This may protect you from future loss events as well as significant increases in premium driven by general market losses. Hollard Insure offers a focused and regulatory-compliant cell captive insurance solution on its Hollard Specialist Risk Insurance license.