The variety of risks covered, the number of captive insurers, and their size have all increased over time[1]. There are about 7,000 prisoners worldwide, according to Caroline McDonald, who wrote the article Captive Creativity for Risk Management magazine this month[2]. This is a seven-fold rise in 30 years.
Captives are more frequently utilized for coverage that is distinctive in addition to the more conventional types of insurance that the captive offers to its parent firm. This includes coverage that is less clearly defined by the standard insurance market and cyber insurance. This is not a problem by itself. However, it is standard practice for the captive to reinsure into Lloyds or another UK-based insurance market in order to reduce its maximum loss exposure. While doing so is frequently a wise The UK Insurance Act[3] takes effect on August 12th, 2016, and for captives that reinsure into the UK market, this might provide some difficulties.
The following insurance fundamentals are modified by this Act: It places the onus on the insured to fully disclose to the (re)insurer any material information upon which the (re)insurer may make its decision to offer the sought insurance. The typical insurance application process of “ask, and I will tell” is effectively bypassed under this statute. It won’t be appropriate to give a general description of the covered assets or how the insured risk was located and estimated for the insurer.
The captive management, in particular the parent company’s risk manager, must bear the whole weight of the responsibility. This change is effective for any new placements or renewals made as of this Friday. This person frequently serves in managerial capacity within the captive itself.
What can you do, then?
The secret is to actively look for views and information on the hazards that need to be covered.
Spreadsheets and handwritten notes should not be used to fully document this procedure; they are just asking for trouble.
Present the data in a way that prevents the reinsurer from using the new act’s provisions to avoid paying for claims.
Spreadsheets and hazy notes will be replaced with organized, well-documented, impervious to corruption, auditable, and effective systems for seeking, gathering, confirming, aggregating, and reporting. Simply put, the 70% of firms’ risk managers who presently use these shaky technologies to try to manage their biggest risks will need to put in place reliable procedures.
The alternative is to stand in front of the board, investors, and eventually the media to debunk the insurance protection they relied on while making strategic decisions to safeguard the company’s financial stability.
That is the definition of a career-limiting action.
Our white paper, Are You Prepared for the UK Act of 2015?, has further information.