The rising rate environment, paired with capacity reductions and more restrictive underwriting guidelines from carriers, have resulted in insureds increasingly looking to alternative risk managers to more effectively manage their risks. A prime example of this development is the property market in Florida where five property insurers have been deemed insolvent since February and other insurers left the market, or drastically scaled back coverage, amid high losses.
While captives are in the forefront of these strategies, other risk management alternatives exist as well.
There are several potential benefits with an alternative risk management strategy:
- Reduced insurance premiums
- Reduced transaction costs (brokerage and underwriting expense)
- Continued market access when conventional markets may not be accessible
- Tailored coverage to the specific risk management needs
- Flexibility regarding the insurance structure
- Alignment with insurers / reinsurers
- Ability to (partially) retain economic benefits
- Control over claims handling process
Overall, captives can create more stability and predictability compared to the conventional insurance market, if used properly.
While captives have historically been prevalent for global corporations with complex insurance needs, the use of captives has expanded to mid-sized companies in recent years, primarily driven by the need to find alternative ways to address risk management requirements amid more challenging market conditions. According to the Insurance Information Institute, the number of captives domiciled in the U.S. increased by 14.4% between 2020 to 2021 compared to a compound annual growth rate of 4.8% between 2010 and 2021 demonstrating an acceleration in the growth of the captive segment in recent years.
While the foundation for the arrival of a firm/hard market existed prior to COVID-19, the losses incurred as a result of the pandemic exacerbated the transition from a soft to a hard market. Furthermore, the pandemic likely influenced the duration with this cycle having already exceeded historical hard market cycles, which ranged between one and two years. With carriers having drained the opportunity for further meaningful reserve releases and inflation potentially impacting future loss results, alternative risk managers may be uniquely positioned to continue to thrive in this unique environment.
Why is this Relevant for Insurance Brokers?
While the current market environment poses challenges for insureds, it represents an excellent opportunity for brokers to differentiate themselves from competitors. As carriers are implementing rate increases across lines of business, leaving many companies with stellar loss experience exposed to significant rate hikes, brokers can help insureds navigate through this challenging market environment by providing more efficient insurance solutions.
How are Insurance Brokers Responding to this Trend?
There has been an increase in deal activity with insurance brokers (i.e. consolidators) looking to bolster their alternative risk management capabilities.
MarshBerry advised Innovative Risk Management, Inc. (acquired by One80 Intermediaries LLC) and Caitlin Morgan Insurance Services (acquired by DOXA Holdings LLC) in their respective sales to leading insurance brokerage platforms.
The trend towards alternative risk management structures is expected to continue as companies seek more flexible and efficient insurance solutions that can help insulate themselves from the ebbs and flows of the conventional insurance market. As a result, the demand for brokers with alternative risk management capabilities is anticipated to remain strong.
The current market environment not only allows alternative risk managers to take advantage of high valuations, but it also provides them the opportunity to become an alternative risk management platform of a large insurance broker. By partnering with a larger organization, select firms can take their operations to the next level with increased resources and access to capital.
If you have questions about Today’s ViewPoint, or would like to learn more about current developments in the insurance brokerage market, email or call Tobias Milchereit, Vice President, at 646.599.6589.
