The Absence of Alternatives?

The wrath of the hard insurance market in Canada did not cause a “big bang” in alternative risk transfer (ART); it evoked a “whimper” of tire-kicking over non-traditional solutions. Yes, there were companies that increased self-insurance retentions, reviewed limits and even participated in “cell” captives or “rent a captives,” but the anticipated flurry of activity lay stagnant.

In the liability crisis of the 80s the creation of several different reciprocal insurance exchanges – including universities, municipalities and electrical utilities – was spurred by only one court case in Brampton, ON. In the recent hard market, when one could argue there was a much greater justification for investing in an alternative solution infrastructure, we haven’t seen much action in areas like reciprocals, captives, risk retention groups, catastrophe bonds and other insurance-linked securities.

Why? Many believe that the traditionally lower than average prices for insurance in Canada have made it relatively easy and efficient for companies to transfer risk. This is particularly true for larger organizations and specific lines of business, such as commercial property. Many firms seem to believe in the theory of waiting for the storm to blow over, instead of making the jump to ART.

Another reason that alternative solutions may not be taking hold is the complexity and uncertainty involving non-traditional instruments. Several captives went into run off and eventual liquidation over the past three years due to the well-known scandals involving Arthur Andersen LLP, Enron and WorldCom Inc. There have also been collapses – notably in the U.S. medical malpractice area – of risk retention groups.

There are valid reasons for the reluctant approach to ART. In the end, the benefits of a non-traditional vehicle have to justify the costs. All solutions must have a long-term window that is impervious to cyclical changes in the insurance market.

However, the sparing use of true ART solutions in the Canadian market has implications for concepts like Enterprise Risk Management. This much-hyped approach involves eliminating the “silo” approach to risk management, analyzing the total risk profile of an enterprise and developing solutions that embrace both traditional risk transfer and alternative methods. In Canada, there has been much more talk about implementing ERM strategies than action, leaving many Canadian risk managers in the role of “insurance purchasers” rather than on the front lines of experimentation.

For these risk managers, the taste of a hard market has surely left some lingering doubts as to how sustainable this approach will be in the long-term. Going to the board to justify substantial rate increases, restrictive terms and, in many cases, reduced coverage is not a pleasant experience. Neither is explaining the insurance cycle for the umpteenth time. With rates improving, capacity returning and coverage slowly expanding, that feeling of vulnerability is receding, but not forgotten.

In fact, one sharp thorn in the side of the p&c industry’s recovery has been the stubborn professional liability line, particularly in the mid-market. One could argue that there has been absolutely no recovery in this line of business. Many medium-sized professional firms are still seeing significant rate increases, onerous terms and conditions and even a lack of capacity. This may be the area where risk managers move beyond tire-kicking to pursue some real alternative solutions in the Canadian market.

The question is: are insurers and brokers paying attention?

Steve Wilson, Senior Publisher steve@canadianunderwriter.ca