Property insurance costs are easing. Why are some buyers still choosing to keep more risk?

FM’s Laurel Rudnick explains why alternative risk transfer can still make sense in a soft market, and what brokers should weigh.

Commercial property buyers now have more capacity and stronger pricing options available as they look ahead. Yet lower insurance costs have not removed every company’s interest in keeping part of its own risk, according to FM chief underwriting officer Laurel Rudnick (pictured).

Rudnick said businesses that have invested heavily in hardening their facilities may feel confident in their resilience and be willing to share in losses. For brokers, the key question is whether an alternative structure such as a captive cell or a parametric solution better meets the client’s long-term needs, even when standard coverage is easy to obtain.

“We certainly have clients who are interested in those primary layers and having a participation in that, but not necessarily through a straight deductible or a straight retention,” Rudnick told Insurance Business.

A structured solution can also let a client take part in a primary layer of risk while limiting its exposure, she added.

Captives remain attractive as property pricing softens

WTW said captive use remains robust despite easing commercial property rates, according to its latest market update. The brokerage cited continuing catastrophe and secondary-peril losses, along with pressure in casualty and other liability lines, as reasons captives are still in demand.

In Vermont, the largest captive domicile in the United States, regulators licensed 51 new captive insurers in the latest annual period, up from 41 in the prior year. The state finished the year with 707 licensed captives, including 30 dormant companies, compared with 683 a year earlier. Those totals do not include individual captive cells.

Even with cheaper property insurance, why would a company choose to retain more risk? One reason is that alternative arrangements are built to be viewed over a longer horizon than a single renewal and are meant to complement a traditional insurance program.

“Many of them are actually on a multi-year basis,” Rudnick noted. “They’re not spot solution for a short-term need.”

What should brokers raise with clients?

FM has recently broadened its alternative risk transfer offerings, adding parametric insurance, structured risk financing and captive cell arrangements to its existing property coverage.

For brokers considering an alternative program, Rudnick said the discussion should begin with the client’s objective and how much risk it is prepared to keep. From there, several factors can help guide the decision:

• The client’s objective: Is the business trying to share losses it believes it can manage, address a specific exposure or supplement traditional coverage? Rudnick said that answer should determine the structure.
• Its appetite and capacity for retained risk: A client may be willing to absorb more exposure, but only to a certain extent. Brokers should discuss how much volatility the business is prepared to take on, both operationally and financially.
• The strength of its risk improvements: Spending on facility upgrades and loss prevention may support confidence in retaining risk. Rudnick cautioned, however, that a few calm years do not tell the full story of exposure.
• How the arrangement fits the existing program: Captive cells, structured solutions and parametric policies serve different purposes. Brokers should consider how an option would work alongside traditional coverage, including deductibles, limits and exclusions.
• The trigger and potential payout: With parametric coverage, brokers should assess whether the trigger matches the client’s exposure. A qualifying event may produce a payment that differs from the actual loss, while a loss could occur without the trigger being met.
• The longer-term commitment: Some alternative arrangements run for several years. Brokers should consider whether the structure would still suit the client if property pricing or capacity changes.

Recent catastrophe experience may also shape the discussion differently for each client. Rudnick pointed to severe convective storms and hail as examples of risks that could spark interest in parametric solutions, which are built around specific event triggers.

A coastal business that has invested in wind protection, meanwhile, may be more willing to retain risk after a stretch of relatively light activity. But Rudnick cautioned against using only a few years of loss history when making that call.

“What we can bring to the table in that instance is a true view of the exposure,” Rudnick said, “not relying just on a few years of loss experience, but how hardened are those facilities if a future event is to occur, and is that something that they’re willing to participate in?”