By Carolyn Cohn
LONDON, May 23 / PRNewswire / – With the coronavirus pandemic fed up with soaring prices and stricter conditions on their insurance policies, companies are turning to internal insurance companies.
These so-called “captive” insurers are already widespread among large corporations, with most FTSE 100 and Fortune 100 companies owning one according to the industry.
But billions of dollars in pandemic damage have spurred traditional commercial insurers to hike insurance tariffs and encourage companies to use their prisoners for more business classes or to start new ones.
“For many, insurance is or will be more expensive, so people are turning to prisoners,” said Rodney Bonnard, head of insurance at EY UK Financial Services.
“We’re seeing a massive increase.”
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According to insurance broker Marsh, 76 new captives were formed worldwide this year, up 200% year over year. This growth is “unprecedented,” said Michael Serricchio of Marsh Captive Solutions in a recent webinar.
Captives are founded as insurance companies with their own insurers, although, according to industry information, the regulatory requirements were a little less burdensome. Most prisoners do not write business for other companies.
This insurance status allows them to take out reinsurance – insurance for insurers.
Business insurance buyers are unhappy with the current situation. According to Marsh, commercial insurance prices rose an average of 19% in the second quarter, while insurance policies were also excluded more during pandemics, for example.
This combination of events is referred to as the “hard” market by insurers, but the UK insurance buyers association Airmic has renamed it “hard”.
“Insurance companies are priceing their way out of the market,” said Julia Graham, Deputy CEO of Airmic.
“If you can’t get fire or flood insurance at a reasonable price, you can get it yourself.”
Half of those polled in an Airmic survey of members are already using prisoners, and another 20% are considering creating one.
Laurent Nihoul, group leader for insurance at steelmaker ArcelorMittal, said companies were facing a “triple crisis” from insurers who raised prices, reduced the coverage they offered and introduced tougher terms.
“The relationship with the customer is not the same as before – the quality of service is deteriorating,” he said in a recent webinar organized by the trade association of European risk managers, Ferma, adding that ArcelorMittal is “more and more” using its captive .
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However, insurers say the recent price hikes, which began before the pandemic but accelerated as a result, are due to years of falling interest rates. Despite recent increases, premium rates have generally not returned to levels seen a decade or more ago.
Insurers also say they are at greater risk due to the pandemic.
One of the soaring business classes that are encouraging a move to captivity is the insurance of directors and officers, which companies take out against legal costs.
According to insurance broker Gallagher, this has increased by up to 2,000% for particularly exposed companies as a result of COVID-19.
According to risk modeling company Praedicat, more than 200 lawsuits have been filed in US courts against companies allegedly responsible for introducing and spreading COVID-19 in the US.
Other lines of business that are increasingly being written by captives are cyber insurance, according to a Marsh survey of regulators, while 25 captives are already buying pandemic insurance, a sector Marsh is expected to grow.
Pharmaceutical and energy companies are likely to be used as prisoners due to the risk of damage to their products.
However, according to industry data, all types of companies use captives.
Aluminum company Norsk Hydro told Reuters it had the world’s oldest running captive, founded in 1920. A captive can cut insurance costs and keep all profits in the company, it said via email.
Prisoners are often stationed in offshore locations such as Bermuda and Guernsey, which can bring tax benefits.
For some companies, however, the prospect of setting up an in-house financial institution is not attractive due to strict capital requirements, especially in Europe.
“The downside is that it is a Solvency II regulated insurance company (European Union),” said Brian Kirwan, head of structured solutions at insurance broker McGill.
“You need to have the regulatory structure.” (Additional reporting by Barbara Lewis; editing by David Evans).
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