Healthy alternatives

November 6, 2007

I’m in Scottsdale, Ariz., this week, attending the 17th World Captive Forum, where approximately 350 attendees have gathered to discuss the latest developments in captive insurance and other alternative risk financing techniques.

The meeting began this morning with a keynote from Robert P. Hartwig, president of the Insurance Information Institute, who suggested the future bodes well for the alternative risk market, though things might not look quite as bright in the near term for traditional market insurers.

“The majority of the market is still traditional, but the alternative, including captives, has grown consistently,” Mr. Hartwig said, with alternative risk financing vehicles now making up over 30% of the total risk transfer market.

And, though the traditional market is softening considerably, insurance companies shouldn’t assume that insurance buyers that looked to captive insurance vehicles when prices were high and coverage was scarce will abandon those vehicles and return to the traditional insurers, the III president said.

The insurance industry has made buyers comfortable with the notion of retaining more risk, Mr. Hartwig said, “So there’s leakage everywhere.” He laid out a scenario in which primary insurers are being squeezed by buyers’ higher retentions, excess insurers are being squeezed by higher primary retentions and lower reinsurance attachment points and reinsurers are being squeezed by higher insurer retentions and a growing risk-linked securities market.

Still, the global commercial lines insurance market’s results were “excellent” in 2006 and are “very good” this year, according to Mr. Hartwig, with prospects for the industry┬áto still turn an underwriting profit in 2008. But, as prices soften and the industry moves towards what Mr. Hartwig suggested history shows is an inevitable trough in the insurance market cycle, a key challenge for insurers will be whether they can maintain price and underwriting discipline.

One factor that might help them maintain that discipline is the current relatively low interest environment and relatively volatile investment markets, which are enforcing discipline, Mr. Hartwig said. In such an environment, where insurers’ investment returns are challenged, cash flow underwriting won’t work, he said.