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Commercial buyers weigh alternative risk financing

Posted On: May. 9, 2023 6:40 AM CST

risk management

Buyers continue to explore alternative risk financing options such as captives, parametrics and insurance-linked securities as property insurance market conditions remain challenging.

They are also making greater use of data and analytics, as they look to differentiate their business and demonstrate better risk control to insurers, experts say.

In the soft market, policyholders show less tendency to invest in risk improvement, said Scott Ewing, Martins Ferry, Ohio-based head of risk consulting in the Americas for Axa XL, a unit of Axa SA. “Now, in a lot of cases, it’s a condition of coverage,” he said.

Policyholders that better manage and improve their risks are likely to get a better result in the hard property insurance market, Mr. Ewing said during the Risk & Insurance Management Society Inc.’s Riskworld annual conference in Atlanta last week.

In a market where the amount and cost of capital is beyond risk managers’ control, focusing on the quality of the data they provide to insurers regarding their organization’s valuations is critical, said Crystal Flack, Dallas-based vice president, real estate and hospitality practice, at McGriff Insurance Services LLC.

“Are we doing everything that we can to show our risks in the best possible light and to present it in a way where a carrier can look at it, model it against their book and say, ‘Yes, it makes sense for us to continue to be partners at a rate that isn’t debilitating,’” Ms. Flack said.

Large account and larger middle market policyholders are “frustrated” with continuing property rate increases and are looking at alternative ways to insure or self-insure property risks, based on the price points for coverage, said Michael Chang, head of corporate risk and broking for North America at Willis Towers Watson PLC.

WTW is seeing “a lot more use” of parametric products, Mr. Chang said.

There’s been a consistent interest among more sophisticated policyholders in captives in the past two years, said Alfred Bergbauer, New York-based head of captives, multinational, programs and TPA services at the Hartford Financial Services Group Inc.

“Almost everyone is looking at restructuring their property programs because of the availability of limits, pricing and introduction of higher deductibles and restrictive terms and conditions. For clients that have the balance sheet and the risk sophistication to look at risk financing in a different way,  captives are just another tool,” Mr. Bergbauer said.

Cell captives and single-parent captives are responding well to property risk, said Michael Serricchio, Norwalk, Connecticut-based managing director of Marsh Captive Solutions, a unit of Marsh LLC.

Marsh has seen 7% growth in property premium in captives under its management in North America in the past two years to $10 billion in premium, he said.

“You’re seeing fronted reinsurance, you’re seeing quota shares, you’re seeing excess. You’re seeing captives take participations of property layers that you've never seen before,” Mr. Serricchio said.

The next marker for the industry will be the June 1 and July 1 reinsurance renewals, which have a heavy focus on U.S. property catastrophe business, including Florida.

Looking beyond mid-year, market conditions will depend in part on how the Atlantic hurricane season plays out.

“I do think that it’s going to smooth out in ’24,” said Joe Peiser, New York-based head of commercial risk solutions, North America, at Aon PLC.

“The current market will be satisfied with the rate and the values that they have,” Mr. Peiser said.

In addition, capacity will likely increase as more ILS investments come into the market, he said.

Gavin Souter contributed to this report.