Retention Surges to No. 1 Issue for Captive Owners and Managers
By CYRIL TUOHY, managing editor of Risk & Insurance®
TUCSON, ARIZ.---The soft insurance market and the weak economy has turned policyholder retention issues into the No. 1 concern for captive owners and managers last year, according to the 2011 fronting and reinsurance survey issued by the Captive Insurance Companies Association.
"It's a challenge to hold on to those policyholders in the soft market," said Patricia Villarreal, director of risk management for Starwood Hotels & Resorts Worldwide Inc., speaking last week in Tucson, Ariz., at a gathering of captive managers and service providers. "They treat insurance coverage as a commodity at times." Starwood uses a captive to reinsure its resorts, lodging and hospitality industry risks.
Policyholder retention concerns jumped four percentage points from the previous survey, and supplanted worries about having to post enough collateral as the No. 1 issue. Captive managers had indicated in each of the past two years, in the wake of the Great Recession, that collateral issues were their highest concern.
There are plenty of reasons for managers to leave their captives. When rates in the traditional market are soft, as they are now, Fortune 500 companies can rely more heavily on insurance carriers and less on their captive, in effect an in-house insurance company.
Traditional insurance companies are fiercely competing for business, lowering prices and extending favorable terms.
Another reason to leave the captive is that managers need the capital for other parts of the company, said Michael R. Mead, a member of CICA's Fronting Survey Committee.
The weak economy isn't usually a reason for people to abandon the captive marketplace as insureds often need their captive when prices harden again, he said. Managers, he said, need the money to fund other parts of their companies.
"The idea with the most support was the soft market tempted some insureds to leave their captive and risk retention group for the traditional market," Mead said. "But others pointed out that because of the economy, the insureds took out their funds and didn't support the group."
Survey results were released last week at the 39th Annual International Conference of the Captive Insurance Companies Association.
One in five--20 percent--of respondents in this year's survey said issues surrounding policyholder retention and growth was their top concern, followed by expanded utilization (15 percent), collateral concerns (12 percent), and regulatory issues (11 percent).
Last year's survey found 27 percent of respondents citing collateral issues as their top concern, followed by regulatory issues (16 percent), policyholder retention/growth (16 percent), and tax, fronting and expanded utilization (7 percent).
The survey also found reinsurance costs are reasonable, as only 10 percent of respondents reported that they considered the price of reinsurance to be "expensive," while 84 percent reported the price to be "reasonable." Just 6 percent reported reinsurance as "inexpensive."
Mead had a word of caution about the reinsurance results. Cheaper prices, yes, but that also means coverage is often full of holes--a "Swiss cheese policy," Mead said. "To keep premiums low, they are pulling coverage out," he said.
Low reinsurance rates may not hold for long. "I definitely think we're going to see signs of a tightening market," Villarreal said. "We're going to see a shift after the events of last week with the (Japan) earthquake and the ensuing tsunami. U.S. underwriters are going to be tightening down faster than the European Union underwriters."
While the brunt of the claims associated with the 9.0 earthquake that struck Japan on March 11 will be borne by Japanese insurers and the Japanese government, global reinsurers are also going to be affected.
Swiss Re announced Monday, March 21, that it was expecting earthquake-related losses to cost $1.2 billion, and Chartis warned it would be on the hook for $700 million in connection with the quake.
March 21, 2011
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