Since the start of the global pandemic, many businesses have experienced negative impacts from risk events well beyond anyone’s ability to predict or control, with downstream effects to supply chains, resourcing, operational continuity, cost of coverage and much more. As a result, businesses are being forced to reassess their risk management programmes and identify new avenues to take control of both cost and risk coverage.
In this article, we will explore some of the most popular alternatives being used by companies today and the benefits being realised to their risk management programmes in a post-Covid, high inflationary environment.
Reassessing risk management
In an increasingly volatile global marketplace, with operational and cost challenges, businesses of every size find establishing and maintaining control over their risk exposure to be of the utmost importance. Insurance has become far more than just a line item on the P&L as it impacts all levels of a business, from shop floor to executive level.
Within the current hard market, companies are looking to reduce their renewal spend while extending risk coverage in new areas such as cryptocurrency, cybercrime and other emerging threats.
Risk management programmes are important in supporting strategic objectives, managing costs, mitigating new exposures and proactively identify emerging threats.
Alternatives to traditional insurance
ART is a segment of the insurance market that was historically explored by large companies, though in the current environment, small and medium-sized businesses are also realising the benefits of such vehicles. With ART, companies can purchase coverage and transfer risk outside traditional commercial insurance, which cannot always provide sufficient coverage at a reasonable cost.
Alternative insurance options include alternative risk transfer vehicles (captive insurance solutions) and alternative products (insurance-linked securities). Both allow insurers, and the insured, to better respond to changing market conditions and remain competitive.
Captive insurance
Captives are regulated special purpose entities licensed as insurers. They are established primarily to insure a proportion of the risks of a sponsor, typically a corporate parent, allowing them to supplement current risk management programmes. Captives can be either insurance or reinsurance entities and can be used to insure third parties or parent/affiliate organisations.
The captive insurance industry has existed since the early 1960s. At the time, regulated self-insurance was seen as an opportunity to reduce reliance on the commercial insurance market, which was both expensive and reluctant to cover certain types of risk, with this motivation still holding true today.
Insurance-linked securities (ILS)
Insurance-linked securities, also known as ‘catastrophe bonds’, are an alternative product to the traditional reinsurance market. They provide insurers the ability to spread risk and raise capital through the open market, while investors have the benefit of diversification and real returns independent of the capital market.
What are the benefits of ART insurance options?
Captive insurance
- Reduced dependency on commercial insurance
- Direct access to reinsurance markets; bypassing the conventional insurance markets and avoiding mark-up costs
- Low overheads
- Stable pricing over time
- Customised coverage
- More control over claims handling policies and procedures
- Direct investment options
ILS
- An important source of diversifying capacity for companies, expanding the traditional panels of reinsurers covering higher-cost risk events
- Access to higher-yielding risks offers the opportunity for greater returns with more diversity from peak perils
IQ-EQ can help
With IQ-EQ’s global footprint, strategic relationships and extensive industry expertise, we are uniquely positioned to help guide our clients through the opportunities that alternative risk management can offer. We help seek cost-effective ways to supplement (rather than replace) insurance, building more robust long-term solutions.
Contact our team today for assistance with ILS fund administration, insurance management, process outsourcing or risk management strategy.
