Market easing for multinational insurance but growing role for captives

RISK EXPERTS AT AN annual global conference by Commercial Risk have offered the view that global programmes are experiencing an ease in market conditions but they say rates are still increasing, adding that a hard push on buyers by insurers, could lead to more companies yet turning to captives.

Clarissa Franks, UK placement leader at Marsh, said average rate increases are reducing on most lines, with the exception of cyber. Franks said the market isn’t softening but she is seeing a broad range of outcomes and achieving rate reductions for some programmes and increases on others. But generally the trend is getting easier for buyers, she said. “It feels like a much easier trading environment to me in most areas of the market,” said the broker.

She noted that clients are beginning to be able to build towers of capacity again for D&O [director and officers], a particularly troubled line during the last couple of years, and there is much more confidence in the market.

Tony Hills, client executive at QBE, agreed that market conditions have eased, and that broadly the pace of increase is lifting. He acknowledged that insurers have, by and large, made a profit during the last couple of years, but asked: “What is a healthy margin for the company that is taking the risk and suffering the volatility when things go wrong? Last year that was around 5%-8%, but is that an appropriate margin for a company that for a couple years struggled to break even?”

He also noted the impact of high inflation on the investment returns insurers will see through 2022 and beyond. Hills said a few years ago, a lot of insurers de-risked by moving out of equities into bonds. But inflation is the enemy of the bond, said Hills. “So insurers will not have the returns from the investment side of the balance sheet to supplement any underwriting losses,” he added.

Elke Vagenende, global head of multinationals at AIG, who spoke on how to secure the best of deals in a hard market, said that risk differentiation is key. She said this has been a trend this year, with insurers differentiating between those who actively manage the risk and want to work together with insurers on data and risk information, and those who don’t. The latter, she said, are going to struggle. “It is not just a passive relationship – it is now more important than ever to have that proactive approach,” she explained.

The risk manager on the panel, Bart Smets, head of insurance and risk at Umicore, agreed that the more information you can provide to underwriters, the better. “It is important to sit around the table and explain what you want. A tailor-made approach to insurance coverage is important. Price is important of course but it is not the only element,” he said.

When asked to look into a crystal ball to see where the market will be in six to 12 months’ time, Franks thinks things will ease further for buyers.

Hills said market predictions are notoriously tricky but, if pushed, he believes things will look similar to now. He noted many of the features that led to the current situation are still around and we now face economic uncertainty, as well as the Ukraine war. “So I would question whether we will see a fundamental shift in the way the market is going to operate over the next six to 12 months,” he said.

Smets said risk managers will start to consider whether it is useful to take out insurance at all if the insurance industry continues to push prices higher and reduces cover too much.

And Franks said she had heard a few insurance CEOs “reflecting on treading the line really carefully towards driving profitability while keeping premium volume in the market.”

“Once the client sets up a captive, it is very unusual for all lines to move out of the captive and back into the market,” she warned insurers.