Asia’s emerging risks drive interest in captives

Interest in captive insurance and parametric solutions is growing in Asia as businesses in the region react to emerging risks and a harder market for traditional insurance.

Fundamental shifts in the corporate landscape, such as the growing importance of big data and intellectual property, are expanding the frontier between real-world risks that companies are exposed to and the universe of risks that insurers are willing to underwrite.

“There’s really a move from asset heavy to asset light, which means that corporations are deriving more of their revenue not from physical assets as they did in the past, but from intangible assets,” Andre Martin of Swiss Re told InsuranceAsia News.And the traditional market has not responded very well to these changing needs.”

That has become increasingly evident during the past year, as some of the most challenging risks that businesses are now facing have come to the fore — non-damage business interruption, ransomware and supply chain risks, for example.

These are all difficult risks for the traditional insurance market to model, but the growth of the digital economy means that these intangible risks are only set to increase.

At the same time, the pandemic itself has also spurred many businesses in Asia to take a more critical look at their approach to risk management. Coupled with the harder insurance market conditions, enquiries about self-insurance are on the rise, according to Martin, and this is supported by data from some captive domiciles in the region. It is also a trend seen worldwide.

“Captives have stood the test of time as effective tools to navigate through uncertainty,” said Ellen Charnley, head of Marsh’s captive solutions business, in a recent report. “The ability to design customized insurance coverages, access alternative capital, and generate profits through third-party business makes captives especially valuable during market transitions.”

However, setting up a captive is no small step. It is expensive, time consuming and capital intensive, and therefore generally only makes sense as a strategic long-term investment. Yes, captives can be an effective way to mitigate the volatility of a hard market, but they aren’t much use as a short-term strategy to avoid rate hikes or bigger deductibles.

Convincing companies in Asia to make that investment is a matter of education. In the past, some companies in Asia have tended to see captives as vehicles primarily designed for tax efficiency, but that is changing.

We see an increasing number of clients who say they are buying parametrics only for the liquidity.
Andre Martin, Swiss Re

One way to experiment with the benefits of self insurance is through a virtual captive, which is not actually a captive but an insurance contract that seeks to mimic the mechanics of a captive, without the set-up costs or run-off considerations.

Index-based insurance

Parametric solutions are another option that risk managers in Asia are turning to, either as a way to protect their intangible assets or to plug a gap in traditional insurance cover, or both.

Because parametric solutions are not connected to the underlying asset that a business is trying to protect, they can readily be applied to purely financial exposures, such as the risk that a supplier on the other side of the world is affected by an earthquake or a typhoon.

Another attraction is speed of payment. Parametric products pay out based on a clearly defined trigger, which eliminates the kind of lengthy claims adjustment that can delay traditional insurance payments.

“If you get the money five years after the event, the value is drastically diminished,” says Martin. “So we see an increasing number of clients who are buying parametric insurance to have quick access to liquidity after an event.”

Japanese corporations have led the way in the use of parametrics in Asia, but they are now becoming more common in Australia and New Zealand, as well as some of the catastrophe-exposed markets in the region, such as Taiwan, the Philippines and Indonesia.

As the corporate risk landscape continues to change, alternative solutions to traditional insurance are likely to move into the mainstream in Asia.

This article was first published in Insurance Asia News on 9 June 2021.

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