“FOR ANY BUSINESS WITH A MODERATE ASSET BASE, PREMIUM VOLATILITY CAN BE A CHALLENGING MATTER TO DEAL WITH. SOLUTIONS ARE, HOWEVER, AVAILABLE.”
aspect is to develop processes to assess, quantify and determine the exposures and have a clear strategic approach to managing risk. One thing is for certain: a business with poor claims history pays more.
However it is not just the claims side that is causing consternation,
it is how insurers perceive that you manage your risks and hazards. Insurers may pose many questions to you in an attempt to understand your risks. Typically those questions include topics such as building age, construction, protection features, location, your business and potential hazards. Critical to the assessment is to determine what steps the organisation needs to take to mitigate risk, such as the development of flood plans and levees, raising vulnerable plant above flood levels, additional bracing and fixing defences in wind-prone areas.
Given the significant increase in damage costs from natural disasters during the past 15 years, coupled with growing population numbers and assets being located in high-risk areas, we need to look at different approaches to risk transfer while businesses and property owners adopt more defensive strategies and mitigation measures. The ‘it cannot happen to me’ approach is clearly being challenged.
Inevitably, premiums reflect risk, which becomes a component to
the cost of capital; this in turn is reflected in insurance premiums. Hardening markets tend to take an enhanced risk-based approach, while premiums in soft markets adopt a market share perspective. Nevertheless, premiums generally reflect the perception and assessment of risk. Businesses should thus be attentive to these signals as price consequences reflect an insurer’s view of risk profile. This requires a mitigation strategy that involves both the assessment of risk in terms of frequency and severity and an engagement in cost-effective mitigation measures to reduce vulnerability to catastrophes and mechanisms to manage working losses. This does not always happen and as a result pricing tends to fluctuate based on market sentiment.
For any business with a moderate asset base—which may include elements of property, equipment, stock, raw materials, finished products and business interruption exposures—premium volatility can be a challenging matter to deal with. Solutions are, however, available. One with proven long-term benefits is captive insurance. Such a vehicle is set up to provide insurance solely for the organisation concerned, which enables the company to retain risk at a level it is comfortable with,
while at the same time having the financial capability to manage and smooth premium across the business.
The establishment of a captive requires a business first to consider
what the risks are. There are various methods to develop risk tables, to determine what risks are tolerable, what risks are transferable, what risks need treatment and whether there may be some risks that should be terminated. Once this has been determined a captive can be structured and managed to deal with the risk-financing strategy that has been evaluated by the organisation to deliver the optimum outcome for them.
Why Labuan?
Setting up a captive is not a complex task, and Labuan International Business and Financial Centre (Labuan IBFC) prides itself on being a business-friendly environment for such structures. Labuan IBFC as a captive centre has been operating since 1996 and has developed a robust fiscal and regulatory environment. This, coupled with available expertise, competitive costing and sophisticated regulation, has attracted business, banks, insurers, reinsurers and captives to Labuan to establish their risk-financing entities.
New legislation introduced in 2010 has greatly streamlined the administrative procedures for captive insurers and introduced improved structures to enable the formation of captives via protected cell companies. In addition, Malaysia has long been regarded as the world leader in Islamic finance, and various structures are available to manage both conventional captives and Islamic or takaful captive vehicles.
Labuan IBFC offers local and global organisations the benefits of being in a leading international financial centre, captive insurance being one of the integrated financial services available from Labuan IBFC.
With increasingly challenging operating environments and reduced insurance capacity, coupled with a hardening market, now is the time to look at the strategic benefits associated with a captive insurance structure or any one of a range of financial services that Labuan IBFC has to offer.
Dwane Feehely is an insurance advisor at Labuan International Business and Financial Centre. He can be contacted at:
dwane@labuanibfc.my
66 emea captive 2012
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