Inflation and the hard insurance market are pushing even big corporates to closely consider their insurance options, including alternatives such as captives. Here, Marsh New Zealand chief client officer Stephen Walsh (pictured) talks about captive solutions and parametrics, and what the major considerations are for those opting to take these routes.
“We are seeing an increasing number of questions being asked by big insurance buyers in New Zealand as to the value that the traditional insurance market provides to them,” Walsh told Insurance Business. “This is coming from listed businesses, large corporates, and large government.
“It comes amid the context of rising prices and reductions in coverage, in combination with a highly inflationary environment. Clients do not have an endless supply of money to spend on rising insurance costs, so all of the above is prompting them to look at other alternative risk transfer solutions such as captive insurance.”
The chief client officer highlighted that captives, for the most part, offer long-term benefits while solving three key risk financing issues.
“Firstly, they can provide cover that’s not traditionally available in the insurance market,” noted Walsh, who largely deals with corporate and risk management clients in the port, property, and large infrastructure sectors. “Secondly, captives can smooth out the expense and premium volatility, and, lastly, captives are emerging as a potential solution for new and emerging risks such as cyber.”
According to the Marsh veteran, cyber is an example of where captives can be part of a blended risk financing approach in which a captive is used as a vehicle to build up cash reserves.
He said: “By way of an example, larger companies are usually able to fund large deductibles, around $5 million or $10 million, the sum of which can be carried in a captive, then the traditional insurance market can provide $10 million or $20 million worth of cover in excess of that amount.”
When considering captives, certain challenges must be taken into account, according to Walsh.
“For one, clients need to think about capital allocation, i.e. ‘How much capital do we need to allocate to establish our captive’,” Walsh told Insurance Business. “Secondly, clients need to consider the administrative and regulatory aspects of owning a captive. Most clients need support in navigating the administration requirements of owning and running their captive.
“[From our perspective], managing captives is, in fact, relatively straightforward because they are governed by their respective in-territory prudential regimes and, therefore, very compliance-driven. In New Zealand, managers comply with regulations established by the Reserve Bank.
“Aside from the administration, the other challenge is about making sure that the captive placement strategy is right for the client. As the captive manager, we have a key role to play in developing what the strategy or purpose of the captive is and then executing to this.”
Parametric solutions, meanwhile, are another option worth looking into. Walsh believes they have a significant opportunity to become one of the key alternatives to traditional insurance in New Zealand as the industry becomes more uncertain.
“They will have an increasing role in a partial replacement or part of a blended risk financing solution,” the chief client officer said. “They’re especially relevant given our nation’s exposure to natural catastrophes which are measurable, e.g. earthquakes.
“Property and large infrastructure are examples of sectors which are key candidates for considering these solutions. Marsh NZ has already placed several large-scale parametric solutions… [They are] not for everyone, but certainly large property and asset owners, large infrastructure such as transport, energy, and ports are definite candidates.”
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