Stretching the limbs of the cell captive

The concept of a first party cell captive is not new, but over the years it has proven to be highly resilient as a risk management tool, regardless of fluctuations in market conditions.

The Covid-19 pandemic has in many ways tempered, and probably prolonged, an already hard corporate market in South Africa and in many other parts of the world. Corporate insurance capacity is scarce, more expensive, and the technicalities around covers and exclusions are increasing.

The pandemic and the related losses suffered by the insurance market all over the world has resulted in cover for Covid-19 business interruption being excluded from almost all reinsurance treaties and insurers’ policies. The effect of this has also impacted other insurance covers, which are not disease related.

The financial philosophy of some insurance markets, rightly or wrongly, is that they need to be “paid back” for pandemic losses. They need to correct their “through the cycle” profitability and returns by way of rate increases, tightening on risk management (exclusions and conditions), and throttling capacity for suboptimal exposures.

The result of the above is what we see playing out in the corporate market in South Africa at the moment. While there may still be a fair number of corporate players – underwriting managing agencies and dedicated corporate departments of primary insurers – all the other constraints mentioned above exist. Capacity (the sheer size of cover any one insurer is prepared to offer) is scarce, the premium rates are significantly higher, and we see a plethora of exclusions and conditions being imposed. This increasingly drives corporates and their intermediaries to look for cover in the global market.

Intermediaries have always considered foreign markets, but the extent of this global search for capacity by South African intermediaries has increased in recent times.

A cell captive structure offered by a South African cell captive insurer offers many advantages, but in the context of a search for capacity, the most important is probably that a South African corporate can have access to most insurance markets in the world in the form of reinsurance.

The risk to the entire market is that “something else” is around the corner that is going to come along and “surprise” companies. While I am writing this, parts of the country have been set ablaze. Two of the largest surprises in the South African insurance market, maybe in the last 50 years or so? And very shortly after each other…

The pandemic has made many corporates realise that they should have built up risk bearing capacity in the “good” soft market years – something that could have paid for covers that are excluded by the conventional market. A cell captive provides clients not only with greater control and transparency when it comes to their insurance placement, but also a way to access foreign shores.

At the end of the day, regardless of the vagaries of the markets, cell captives are sustainable and robust. They look set to remain an indelible part of the insurance industry for the foreseeable future.

By Alfons van der Vyfer, Executive Head: Risk Finance Solutions, Centriq Insurance