“Alternative Risk Transfer can add significant value by looking at risks differently"

Many corporate risks can be covered through the Property & Casualty insurance market with traditional products. However, in the current market environment more companies are looking beyond traditional risk transfer and exploring the use of higher retentions, self-insurance programs or other forms of risk financing.

Grant Maxwell: A lot more clients are interested in Alternative Risk Transfer these days and we want to serve this demand and be their provider of choice in this rather sophisticated segment. We want to keep the focus on the existing business and clients and show a strong delivery on renewals. In addition, we want to expand our reach, our current offering and our deal pipeline by dedicated investments into our resources and capabilities.  

Alternative Risk Transfer can refer to a wide range of solutions out of the risk management toolbox, for us, the main current focus areas are structured insurance – this are typically multi-year, multi-line concepts – and captive solutions, in particular captive fronting. We are investing and strengthening the team both within the ART lines of business and also across the whole value chain in business critical functions including Operations, Accounting, Actuarial, Claims and Multinational. We are currently about 100 ART specialists globally, and we now plan to recruit 20 more people in the ART line and also a dozen others in other functions. 

Grant Maxwell: We have broad risk appetite in multi-year, multi-line structured insurance for AGCS clients, with a focus on captive solutions. A large, multinational company with their own captive insurance program generally can still benefit from certain services from insurance companies. Typically, captives don’t have the capital that insurance companies have, they don’t have regulatory permissions for insurance transactions around the world or other infrastructure – and it is such services or partnerships that AGCS can offer. A captive therefore often needs to buy reinsurance, which we can provide on a tailor-made basis, plus so-called fronting services, where we do the operational work of issuing and managing the policies, premium and claims payments. Such captive solutions are highly specific, they require a strong global network and the ability to develop and implement bespoke multi-line solutions. We've always had a multidisciplinary approach and skill set. We bring together deal teams that look differently at risks and develop tailored solutions leveraging the full strength of AGCS and Allianz Group.

Grant Maxwell: Allianz has one of the largest global networks in the insurance world, as well as very deep policy and claims expertise and these capabilities are a real differentiator as we can deliver truly multinational solutions for large corporations. On the other hand, ART has a strong track record of providing standalone captive fronting focused on large, bespoke programs. Now we have optimized our organizational set up to serve the needs of a wider selection of our clients and partners. We bring these two core capabilities together under one roof and one leadership – Brian McNamara is responsible for this –moving the multinational capabilities to center stage. This allows us to deliver customized, flexible solutions at a much bigger scale. As an analogy, we bridge the gap between an off the peg suit and a bespoke attire from a tailor’s workshop. Bringing ART captive solutions and Multinational together is a really powerful combination.  

Grant Maxwell: Structured insurance typically is a multi-year, multi-line solution providing a combination of risk transfer and the insured retaining an element of risk. This can be particularly attractive if traditional cover is not available or is too expensive. As an example, we continue to see a lot of opportunity in Commercial Auto, particularly in the United States. For those clients we're replacing what they used to buy in the traditional Liability market with a multi-year solution, which has an element of risk sharing. It allows them to buy cover but means they're actually retaining some of the risks themselves. It is a good example where we can do things differently and provide stable, sustainable solutions, where the traditional market has been very volatile in terms of capacity and price.

Grant Maxwell: By definition, the alternative market and our offerings are always evolving. For example an area we are looking to develop now is addressing environmental, social and governance (ESG) issues such as climate change risk or green energy including using parametric techniques.

Grant Maxwell: As a starting point of any ART concept there is usually a significant issue which keeps a risk manager awake at night and that issue is worth spending time and efforts on co-developing a tailored solution. For example, clients come to us and say: We’re worried about our intellectual property or seeking cover for directors & officer liability or cyber but can’t find it in the traditional market. Or they may just decide they want to retain more risk, spending less premium on traditional covers. Or they are looking for retention financing which combines a stable funding mechanism with risk transfer. These clients are prepared to have more skin in the game, but at the same time they want to manage any downside risks from large loss scenarios and protect their balance sheet from too strong volatility. 

It’s also important to have the buy-in from the management or the CFO to try something new. 

As a rule of thumb, you could say that ART is suitable for a certain kind of risk if you look how cost of claims, cost of traditional insurance structure and cost of capital correlate: If the cost of combined average claims in the long term is significantly lower than the equivalent external premium spend, then an ART program should be considered. 

Grant Maxwell: Let me explain this again with the Commercial Auto segment. These companies have to buy insurance because their clients demand it or it’s a regulatory requirement. The fact is: If they look over a three-year period at their own history of losses, then there's a good chance that they don't actually need all this insurance cover they used to buy. Essentially, what we're offering is a more limited, tailored cover and so if they don't use that cover, then it's cheaper. On the other hand, if a company can realistically expect lots of claims, traditional risk transfer may be the better option. 

ART can add significant value, but not in the sense of offering the same product but cheaper. It’s very much a complementary approach and we don’t want to undercut the traditional risk transfer market. The expected cost for an ART solution may be less than the traditional cover, but that’s because the client shares a portion of the risk themselves and they need to be comfortable with this.

Grant Maxwell: The rate increases may be softening in some areas, but we are still in a hard market phase. That means it's difficult and/or more expensive for many clients to buy traditional covers. They are much more incentivized – and some may even be forced – to self-retain more risks and look at alternatives to traditional P&C products. There is also a growing awareness and sophistication of risk managers – they understand much better where ART solutions could work and add value.  

Another driver of client interest is that the risk landscape is changing so incredibly quickly. Clients and their business models are changing, economic and geopolitical conditions are changing, ultimately risks are changing, and traditional insurance may not be available for such fundamentally new risks as we lack data or claims experience in underwriting. That is where the strength of ART comes in: It’s our different and unique way of looking at corporate risks in a real multi-disciplinary deal teams that bring underwriting, modeling, legal, claims, operations, compliance, everything together.  And that makes all the difference and helped us being successful and creating value for our clients over many years.