Costain Nikisi, Swan for Life
In an era of hardening markets –higher cost of (re)insurance and reduced capacity –it is imperative to look to alternative ways that can answer the same questions of risk transfer. This is where alternative risk transfer (ART) comes in.
A survey by Airmic in Aug 2020 showed that 66.7% of corporate insurance buyers were considering captives and other ART techniques in the wake of 2020’s hard market.
The fast-evolving concept encompasses a wide range of techniques to allow clients to retain and finance or transfer risks. This includes self-insurance, captives, risk retention groups, protected cells, risk pools, finite insurance, multi-line / multi-year programs, insurance linked securities and weather derivatives.
Is ART relevant?
The relevance of ART need not be overemphasized. Risks are evolving – new risks are emerging while some risks have become more important than previously.
ART is also relevant in the context of unique risks which lack sufficient numbers of homogenous exposures so that the usual predictive analytics cannot be used for pricing.
Clients with very good risks may want to sufficiently reward themselves for their good “housekeeping” through techniques such as captives, which allow them to retain the underwriting profits from their above-average portfolios.
For some risks, traditional insurance may be unavailable altogether or offers limited coverage or is just too expensive. ART products help fill these gaps.
Capital requirements are becoming more stringent globally. There are ART solutions for insurers to tackle this reality. For instance, Munich Re offers retroactive reinsurance solutions for relieving the capital pressure from loss reserves and runoff portfolios. Structured reinsurance solutions meant to help insurers achieve certain premium and capital targets, in view of their risk-based capital requirements, are on offer as well.
Our industry is sometimes very dogmatic about foundational principles such as indemnity at a time when clients are more concerned about value creation and enhancement.
The tech and banking industries, for example, embrace innovation to better meet the needs of their clientele.
A key cog in innovation is simplicity and cost effectiveness in addressing a real need. Swiss Re puts it aptly: “Simplicity drives customer satisfaction”. The insurance penetration ratio in sub-Saharan Africa is very low. This is where innovation, such as through ART techniques, can provide some answers.
Parametric insurance is one innovation away from the traditional indemnity-based insurance allowing for quicker, simpler claims settlement.
Covid-19, the biggest story of 2020, presents some hard questions for insurance. Traditional insurance is not suited for the problem primarily because it’s a pandemic -the law of large numbers collapses when a loss affects almost everyone at the same time! It is imperative to develop alternative solutions to this menacing disease, whose potency is still significant. Non-damage BI products are an example of a solution that is relevant. The captive industry is already worming to the idea of captives being used to meet some of the losses.
Insurance industry should lead ART development
The insurance industry, as the go-to sector for risk financing, should take the lead in developing ART techniques, and not leave it to banks. It is gratifying to see global insurers like AXA XL, Zurich, and Allianz having special divisions focusing on ART solutions. If there is any doubt as to the potential for ART to grow insurers’ revenues, this report should remove it: “Allianz Global Corporate Solutions got 20% of its EUR8.2bn premiums in 2018 through ART”!
Reinsurers like Munich Re and Swiss Re also provide ART solutions in areas such as capital management, agriculture, political violence and terrorism and cyber risks.
The world’s top insurance brokers – Marsh, Aon and WTW – are the leaders in captive formation and management.
Therefore it is imperative for players in Africa – insurers, reinsurers, brokers, regulators – to also collaborate and develop ART solutions for Africa’s myriad of uninsured risks.
ART solutions for Africa
Mauritius has positioned itself as a platform for the development of ART solutions that are suited for Africa, especially captives. The jurisdiction has a legislative framework for the setting up and management of captives, which are – need this be said – a simple yet intelligent way for self-insured interests. This is a 50-billion-dollar industry across the globe!