Captive insurers[1] have continued to grow in numbers, size and diversity of risks insured. In the article Captive Creativity published this month by Risk Management magazine[2], Caroline McDonald mentioned that there are nearly 7,000 captives globally — a seven fold increase in 30 years.

In addition to the more traditional forms of insurance provided by the captive to its parent company, captives are increasingly being used for more unusual coverage. That ranges from cyber insurance to coverage that is less well defined by the traditional insurance market. This in itself is not an issue. However, a common practice is for the captive to limit its potential maximum loss exposure by reinsuring into Lloyds or some other UK-based insurance market. While this is often sound practice to protect the captive, on August 12th 2016, the UK Insurance Act[3] comes into force and this may pose some challenges for captives that reinsure into the the UK market.

This Act changes some of the base concepts of insurance: It pushes the responsibility on to the insured to fully inform the (re)insurer of all relevant facts on which they may base their decision to provide the requested insurance. This act essentially skips the “ask, and I will tell” normality of applying for insurance. It won’t be acceptable to provide some vague description of assets to be insured, or even how the risk to be insured has been identified and quantified for the insurer.

The burden is firmly on the shoulders of the captive manager and, in particular, the risk manager of the parent company. This person often has a management role in the captive itself and this change applies to any new placement or renewal from this Friday onwards.

So, what can you do?

  • The key is to actively seek out opinions and facts about the risks to be insured
  • Fully document this process with an auditable methodology — spreadsheets and handwritten notes are just asking for trouble
  • Present the information gathered in such a way that the reinsurer is unable to use the provisions of the new act to avoid paying for a claim

Systematic, well documented, incorruptible, auditable, and efficient tools to seek, gather, confirm, aggregate, and report will take over the current practices of spreadsheets and vague notes. Simply, the risk managers of the 70% of companies who currently try to manage their top risks with these flaky tools will need to implement dependable systems.

The alternative is to face the the board, investors, and ultimately the press to explain that the insurance protection they were counting on when making strategic decisions to protect the financial strength of the company was a myth.

Now that’s a career limiting move if ever there was one.

Learn more in our white paper, Are You Prepared for the UK Act of 2015?