Captives Can Help In Post-WTC Recovery
The insurance industry was dealt a staggering blow by the terrorist attack on America on Sept. 11.
But what about the impact on the alternative market, particularly captives, and the vital role it could play as the insurance industry recovers?
The traditional market is well capitalized as an industry, but I believe that capital is not distributed well enough to enable full, complete and timely payment of all claims ultimately arising out of these disasters.
Much of the reinsurance industry was already facing thin margins at best, and losses more likely, with escalating claims in asbestos and natural disasters.
The capital markets have shunned U.S. property-casualty underwriters for some time due to weak or non-existent profits and returns on investment.
These facts will precipitate, if not outright failures of carriers, certainly coverage restrictions, tighter underwriting and higher premiums. For some it has already begun.
The traditional markets, which are also major players in the alternative market, will move quickly to attempt to mitigate losses and to institute measures to regain profitability.
In the past when coverage became scarce and premiums potentially unaffordable from the traditional markets, buyers have taken a new look at alternatives, seeking coverage and premium relief. Many commercial buyers have previously investigated captives, self insurance funds or risk retention groups.
I expect this pattern to recur, with some speed and urgency. Unfortunately, there may not be much relief.
Self-insurance will remain a viable choice for those firms able to qualify and post security. Those requirements are not likely to be relaxed, which will prevent many risk managers from entering that field.
The inherent challenges of claims reserving and adjusting credibility will give many insurers the option to restrict what reinsurance they might offer in the way of aggregate protection. Attachment points will rise to new levels. Aggregates may disappear, and already have for some lines.
This in turn may cause sureties and other security holders to reevaluate a self-insurer's ability to pay claims. Many providers of aggregate and excess protection will have their capital absorbed elsewhere.
The larger concern for captives is availability of risk-sharing partners.
No captive can function without a risk-sharing partner. There is the clear need for excess and aggregate protection, fully reinsured policies for certification, "fronting," and a variety of services and expertise that can only be obtained from established insurers.
With their human and financial capital focused on their own recovery, I am anxious about how much of these resources they will share with the captive community.
While this may sound a bit negative, I would suggest otherwise. In any devastation, there is opportunity for rebirth and innovation. The world will never be the same, for insurance or any other segment. But insurance will continue, and business will recover.
First of all, no one will know in advance the total, final cost to the insurance industry of the Sept. 11 attacks. There is much work to be done. It will be months, even years before there is a final tally.
As to the opportunity, I would point out that all present insurers started at some point. None of them arrived with the primal seas.
What we are going to be facing is a large vacuum. There will be few carriers ready, willing or able to step up and look at risk-sharing arrangements involving a large expenditure of capital for an uncertain, or low return.
It will be tough to find an audience for new programs. There havent been many players for these programs lately, and this disaster gives them the cover to make the decisions that probably should have been made 12 months or more ago. Not to mention the absolute imperative of their own survival.
As an industry, insurance has always been entrepreneurial and opportunistic. The times demand such a posture now. The players must come forth. New U.S.-based property-casualty companies must be formed, funded, admitted and marketed. Risks can be measured and managed, and paid for.
A necessary part of the recovery and solution is that the cost of risk will increase. As we rethink exposures and ultimate losses, we must recognize that, with few exceptions, the U.S. p-c market has not been an attractive investment.
For the necessary human and financial capital to return, the rewards must be there, and increased premiums and profits are the only way. The industry must adhere to appropriate risk assessment, underwriting and pricing, Only then will the recovery be complete.
Captives can play an important role in this recovery. Captives provide human and financial capital. Captives provide underwriting, claims and risk control expertise. Rather than seeing our risk partners withdraw into a defensive posture as they recover, I urge greater partnership with captives, and that captives create greater partnerships with each other.
Past experiences of this type, which were indeed painful and expensive lessons, can be revisited for the good ideas that they contained. With discipline and foresight many of these ideas could work in the present situation.
Michael R. Mead is chairman of the Captive Insurance Companies Association, based in Minneapolis.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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