AIG
For more than 50 years, AIG has been providing global fronting programmes throughout the world. Marty Scherzer of AIG gives his view of the captive insurance market...
What do you see as being important factors affecting today’s global fronting markets?
In today’s commercial insurance market, there is plenty of risk transfer capacity available at very competitive pricing. Given these conditions, one might conclude that the demand for fronting programmes would decline because companies would choose to transfer their risk rather than retain it via a captive.
However, we are not finding that to be the case and, in fact, we are seeing a growing demand for our fronting services. There are a number of reasons why this is happening. Many of our clients are committed to a sophisticated risk management strategy, which includes a captive programme.
These clients understand the benefits that captive programmes deliver and optimise the use of their captive structures. Although they may purchase more reinsurance when rates are low and capacity is plentiful, they stay the course in terms of utilising a fronting programme to insure their risk.
Globalisation plays a key role in this increased demand. By 2025, nearly 50 percent of the world’s largest companies will come from emerging markets.
While the captive markets in the US and Europe are well developed, insuring risk via a fronted programme is a fairly new concept that is being well received by companies in emerging markets.
We are seeing growing demand from multinationals as they expand their global footprint and utilise captives to write cross-border risks. Trends in global trade will only increase their use of fronting programmes
In addition to multinationals, our target market for fronting programmes is expanding to include middle market companies as well as companies whose exposure is limited to one or two countries.
What are the growth areas for your business?
Growth opportunities span across a spectrum of markets—geographic, lines of business, industry sectors and target companies. Over the last few years, we have seen increasing interest in captives from Latin America and Asia.
Economic expansion in these regions has stimulated an increased demand for insurance products and services, thereby exposing many companies in these regions to the need for a more sophisticated risk management strategy.
As these companies expand their global reach, their risk managers are exploring fronting solutions to address some of their new, unique and growing multinational exposures.
In the US, the Affordable Care Act is encouraging greater use of captives to provide benefits solutions and medical stop-loss coverage, and this trend is likely to continue.
Risk managers today are extending the use of their captives to include more specialty lines such as trade credit, cyber risk, product recall and environmental, particularly when the parent has a poor loss history or coverage is restricted.
The benefits of a captive programme extend to companies across all industries. In particular, we are seeing growing demand from the energy, manufacturing, automobile, mining, engineering, food and beverage, entertainment, and financial sectors.
Multinationals are and will continue to be an important target market.
They present particularly exciting opportunities for growth as these companies have the size and scale to realise significant benefits from utilising a captive, along with a controlled master programme to tailor their risk management strategy to the needs of the parent and subsidiaries in various countries.
In addition, as I mentioned above, our target market is expanding to include middle market companies, where we have seen a growing interest in captive programmes.
Fronting programmes are becoming a cost-effective risk management tool for this segment as ‘rent-a-captive’ cells provide middle market companies with a low cost alternative to a standalone captive that can be formed quickly with minimal start up costs.
To capture the growing demand from this market segment, AIG has recently established a segregated cell company in Bermuda that complements AIG’s existing cell company domiciled in Vermont.
What are rent-a-captives?
Rent-a-captive cells make it faster and simpler for small and mid-sized companies to access many of the benefits of a standalone captive insurance company.
These benefits include having greater control over how the insurance programme is structured, the opportunity to benefit from positive loss experience, and a potential overall reduction in total cost of risk.
Bermuda originated the rent-a-captive cell concept more than 20 years ago and permits a segregated accounts company (SAC) to create and rent out cells to participants. Other jurisdictions have implemented similar facilities.
By ‘renting’ a cell, participants gain access to the facility owner’s insurance license, which allows them to retain and manage their risk, without the costs of starting and operating their own standalone captives.
Each cell is segregated from the others so that insurance risk, liabilities, assets and other pertinent information are not shared. Cells can be used across all industry segments to insure virtually all lines of business.
These rent-a-captive cells are a great way for small- and mid-sized companies to determine if a captive structure is right for them. If the answer is yes and the company wants to set up its own captive, the cell can easily be converted to a standalone captive.
What risks can be addressed using a captive programme?
Captives are time-tested and effective risk management tools with broad flexibility both in terms of the types of risk addressed and the structure of the insurance programme.
Captives can be used across all industry segments to insure virtually all lines of business. Traditional lines such as general and professional liability coverage, emerging risks such as employee benefits and cyber risk, and risks that are unusual or difficult to insure in the traditional insurance market can all be insured via a captive or captive cell programme.
Clients are being truly innovative in the ways they use captives. For example, one of our clients established a fronting programme to help drive sales of its core product.
As the fronting carrier, AIG provides coverage for the performance of the product and reinsures this risk back to the client’s captive.
The end purchaser of the product faces a large, well-capitalised company with experienced claims personnel and infrastructure, while the parent company retains the risk, thereby keeping down the cost of the programme.
What do you view as most important for a fronting carrier to provide to its clients?
The ultimate goal should be to deliver the right solution for the problem. It may sound simple, but it requires quite a bit of work and a lot of discipline.
Clients and their brokers approach carriers with their needs and often, our first instinct is to respond with our existing solutions as promptly as we can.
That instinct could start us off on the wrong road as we would be skipping the first and most important step—truly understanding the problem and the client’s objectives.
I believe Einstein had it right when he said: “If I had an hour to save the world, I would spend 59 minutes defining the problem and one minute finding solutions.”
In order to provide the right solution for the problem, fronting carriers need to invest time and effort in working with the client and broker to ensure that all of us clearly understand and agree upon the problem, the factors underlying it, and the client’s objective.
Having gained this insight, the next step is for the carrier to apply its resources to implement a solution designed to best meet the client’s needs. Important resources for the carrier to have are:
- Significant expertise in fronting programmes with dedicated staff focused on this business;
- A global network that can issue and service locally admitted insurance policies in an extensive array of countries and jurisdictions;
- In-country teams with local expertise to guide clients through the complexities of a multinational program with coverage that meets local regulatory requirements and structures that streamline programme management;
- The ability to seamlessly integrate a global master programme with locally admitted policies if required;
- Superior servicing and claims handling; and
- Excellent cash flow management and reporting.
