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Solving the problem of emerging risks

At a glance

  • Customers are becoming increasingly aware of emerging risks and have a growing appetite for risk-transfer products
  • However, the traditional marketplace can take time to develop an appetite for emerging risks, making it difficult to source desired capacity and pricing
  • Captives can help with this problem and become a powerful tool in any broker’s arsenal

This article counts towards accumulating your annual CII CPD structured learning hours for Emerging Risks.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Summarise how the insurance market is responding to emerging risks.

Visit the CPD Hub to log in and begin accumulating CPD hours.

If you talk to brokers and risk managers, emerging risks – such as cyber and supply chain – are of increasing concern. However, despite a heightened customer awareness of such exposures, and a growing appetite for risk-transfer options, the availability of traditional insurance products remains somewhat limited.

Traditional insurance markets can be reluctant to commit meaningful capacity towards emerging risks, needing first to develop a proper understanding of those exposures to successfully underwrite new products. For brokers, this can present challenges: while keen to make customers aware of key exposures, their options are often limited with regard to sourcing conventional risk transfer products.

Captives, however, can offer a solution to this problem, and support brokers to help meet customers’ ever-changing needs. Not only can they empower customers to finance risk in a more flexible way, but captives can also help to increase the traditional markets’ appetite for their business.

Combating the cyber threat

Technology is moving at an incredible pace, revolutionising the way we do business and the risks our customers are exposed to. Over the last few years, businesses have become increasingly reliant on their network capabilities and more susceptible to cyber threats.

However, as these risks are still very much emerging, there is very little historical data to aid insurers’ full understanding of them, particularly the specific risks facing individual customers.

Owen Williams, Head of Captive Services (GCUK) at Zurich, explains: “It is a bit ‘chicken-and-egg’. Customers are unlikely to hold historical loss data until they have an insurance product, but the market is equally unlikely to provide meaningful capacity without the data that enables them to understand and underwrite those risks”.

For corporates concerned about such exposures, a captive can be a very effective solution.

“Firstly, as the captive is controlling that risk it helps collect that essential data. Secondly, by taking the first layer of exposure, you are moving traditional markets further away from a potential loss, and therefore their risk appetite increases. And thirdly, you are showing a willingness to actively manage your exposures, which improves the market’s confidence in you as a risk.

“All of this not only benefits a business now, by helping to achieve its desired capacity and cost of risk, but can actually help customers achieve better policy terms in the future when accessing the traditional insurance markets.”

Despite these benefits, only 1% of captive owners currently fund cyber risks through their captives, presenting a real opportunity for brokers.

Protecting supply chains

Modern businesses operate in a truly global marketplace. Today’s companies are very likely to have elements of their supply chain operating internationally. This can create complex webs of exposure, penetrating down to multiple levels of a supply chain and spanning various geographical locations. For even the more established corporation, this can be extremely difficult to map.

Supply chain risk therefore suffers from similar challenges to other emerging risks, due to a lack of key data. Again, if an insurer does not have the information to allow them to understand a particular risk, then they are likely to respond with caution, both in terms of capacity and pricing.

Zurich’s Captive Services teams have the tools and expertise to help customers collect and analyse that all-important data. By financing risks through a captive, customers can begin analysing their risks in a much more meaningful way, to help build a more accurate picture of their specific exposures.

Owen explains: “All insurers love certainty. So the more accurate picture you can have around your exposures, and the more data you can show to back that up, then the more likely you are to get terms that accurately reflect your risk; not terms based on general assumptions or uncertain information.”

Realising the potential of captives

Global corporates require risk transfer across various geographical locations, and many jurisdictions will require a locally authorised insurer to issue insurance policies. For a business to license their captives as a direct insurer in all of these locations would be a very cost-intensive process, and potentially outweigh any benefits.

Therefore, most captive structures are now established as ‘gross captive reinsurance cessions’. This is where an insurer such as Zurich ‘fronts’ the captive, using its existing status as a direct insurance provider to issue policies. The insurer then transfers the risk to the customer’s captive reinsurer.

All insurers love certainty. So the more accurate picture you can have around your exposures, and the more data you can show to back that up, then the more likely you are to get terms that accurately reflect your risk”

Owen Williams, Head of Captive Services (GCUK) at Zurich

For this model to be effective, corporate customers firstly need an insurer with a global footprint that can match their activities. The insurer will also need policy wordings in place that are capable of covering potentially global exposures, and provide customers with the experience and tools to enable them to collect and analyse the all-important data.

“Considering those central requirements, you are left with a very small pool of insurers,” says Owen. “Zurich is one such company who can offer all of those capabilities, including global wordings for both cyber and supply-chain risk.”

In an increasingly competitive environment, brokers are continually seeking ways to add more value to their offering, and achieve better outcomes for their customers. Captive solutions can be a powerful tool in any broker’s arsenal, allowing customers to take control of emerging risks, and improve their future attractiveness to traditional insurance markets.

For more information please speak to your local Zurich contact.

Image © Getty

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