Captive insurance is likely to have an important role for European companies in the immediate future as business looks to return to more normal operations from the peak of the pandemic.
Companies will be reassessing their risks and will probably adjust their plans and operations. They may decide to hold more stocks, rather than relying on very tight, just-in-time supplies. They may reduce their use of large office buildings and have more staff working from local or regional centres. Many will want to take advantage of the acceleration in the digital revolution. Meanwhile, cybercriminals are ready and waiting for new opportunities. All have risk implications.
There will be plenty of challenges for the risk manager. Insurance pricing was already hardening before the crisis. Post COVID-19, the market is likely to be unsettled and tougher, as insurers deal with losses on both sides of the balance sheet. Capacity for some lines of cover may be very limited and expensive.
Uncertainty is what we face, and a captive can play an important role in helping us manage that. Captives began as a way for businesses to fill a gap between the protection they needed and what the insurance market was offering. Over time, companies started to appreciate their value as a source of risk information – in short, a risk management tool.
We can safely imagine that the use of captives will rise in the aftermath of COVID-19, as this was already the trend before the pandemic. Preliminary conclusions from the FERMA 2020 Risk Manager Survey show that 43 percent of those surveyed would use an existing or new captive for risks which are difficult to place on the insurance market. While risk retention and alternative risk transfer vehicles were the main strategies for emerging / specific risks, the expected use of captives increased the most between 2018 and early 2020. A captive also gives access to the reinsurance market, which may be less volatile than the primary market.
Pandemic is a systemic risk. Insurance cannot cover a significant proportion of the losses without itself being put under threat of survival. FERMA has urged, therefore, the European Commission to look at public-private partnership to increase future resilience.
Captives can, however, be part of the solution for individual enterprises. There are exposures common to many catastrophe risks where a captive can fulfil a risk management role. Non-damage business interruption is a clear example, and it may be possible to include a pandemic trigger with a limited capacity. Others include extra cost of employee benefits and extra cost of working.
During the revision of Solvency II, FERMA will continue to press for a more consistent application of the proportionality principle. We will stress the value of captives to the resilience of European business. We expect them to be very important over the next decade.
