Insurers, who are struggling with flat prices and paltry investments returns, face extra pressure as companies affected by slowing economic growth and plunging financial markets decide to self-insure, causing the industry to lose money.
Self-insurance, where a company buys protection from a subsidiary, or”captive”, is normally associated with large oil firms facing huge risks that no insurer can cover them at a sufficient price.
But as worries about insurers’ vulnerability to a global financial crisis and increasing pressure to cut costs, captives are becoming even more attractive to many companies.
“In many cases, the companies that are self-insuring are as big as the insurance companies they are placing the insurance with” David Ezikiel, chairman of insurance broker Marsh’s (MMC.N) captive management division, told Reuters.
“From a credit standpoint, they trust their own balance sheets more than their insurers”
Captives have lower overheads than their counterparts and have no incentive to increase profits, which makes them even more appealing to companies seeking a cheaper alternative.
Offering companies transparency over their insurance costs, captives allow companies to predict how a claim will affect future premiums.
As a result, many firms see this as an important advantage, particularly in a time when the economy is flagging and financial markets becoming less secure.
“The general instability of everything economic at this point has driven the increase in interest in captives,” Steve Chirico, an analyst at credit rating agency AM Best, told Reuters.
“There’s so much flux, and the companies are wondering what they can control.”