It’s the latest sign that climate change is upending the norms that underpin how markets function, as the economic cost of covering its fallout balloons. — Bloomberg
New York: As the market for in-house insurance surpasses a record US$200bil, the underlying reasons for that boom show how a hotter, less stable planet is redrawing the risk map for corporations.
Captive insurance, where companies create their own coverage vehicles, is on the rise, according to insurance broker Aon Plc.
Companies are using it to work around restrictions or to avoid prohibitively high prices imposed by external insurers.
And it’s a development that’s particularly pronounced in sectors tied to climate change.
Oil and mining firms are now “using their captives to a greater degree”, John English, chief executive of captive and insurance management at Aon, said in an interview.
That’s as coverage from outside insurers becomes “unaffordable or unappetising from a price and capacity perspective”.
In fact, a number of insurers and reinsurers have simply “turned away” from fossil-fuel firms, he said.
It’s the latest sign that climate change is upending the norms that underpin how markets function, as the economic cost of covering its fallout balloons.
A recent report by Aon noted that the market for captive insurance has grown “significantly” over the past few years, with roughly a quarter of the almost 3,000 companies it surveyed saying they’ve resorted to such arrangements. In 2021, the figure was 17%.
“Climate change is having an amplifying effect on all the risks we know,” said Peter Carter, head of climate and captives at broker Willis Towers Watson. And captives are “playing a role as a shock absorber”, he said.
A captive arrangement typically functions as a special-purpose vehicle (SPV) that’s created to insure, or reinsure, the risk of the parent company that’s setting it up. Companies transfer premiums to their own insurance SPVs.
The construction can sometimes be used to split coverage with external insurers, or make use of alternative-risk transfer solutions like parametrics.
Captives offer tax benefits, and companies using them can reinvest surplus cash from their premiums.
Captive insurance is used to cover a range of risks, spanning environmental to the threat of cyberattacks.
Data on captives doesn’t capture the full extent to which companies are doing insurance in-house.
That’s because a company can also opt for self-insurance, where it sets money aside to cover future losses without creating a regulated SPV.
The global market for captive insurance surpassed US$200bil in premiums last year, marking an all-time record, according to data shared by Willis Towers Watson.
That’s as extreme weather pushes mainstream insurers from the United States to Europe to raise prices to levels that make their services increasingly inaccessible.
Sectors affected by the development span utilities to operators of renewable-energy farms.
“We’re seeing lots of firsts in weather,” said Anna Pereira, senior vice-president at Strategic Risk Solutions, a captive-insurance specialist and the former head of captive and insurance banking at the Bermuda office of HSBC Holdings Plc. — Bloomberg
