PORC evolution lets ILS get closer to ultimate risk buyer: Oliver Schofield

by Artemis on October 20, 2016

The continued evolution of producer owned reinsurance companies (PORCs) enables increased access to the “wonderful” pot of alternative capital, helping insurance-linked securities (ILS) build a closer relationship with the ultimate risk buyer, according to Oliver Schofield.

Addressing an audience as part of a panel discussion at the 2016 Guernsey Insurance Forum, Oliver Schofield Executive Director at RKH Reinsurance Broking, among other panellists, underlined the continued evolution of producer owned reinsurance companies (PORCs) or producer owned insurance companies (POICs), as a driver of future growth in the captive space.

Schofield highlighted that while there is heightened noise surrounding ILS and alternative reinsurance capital across the risk transfer space, it’s rarely utilised in areas such as the corporate insurance space, for example, a sector that he feels has growth potential.

“I believe that with the continued evolution of the producer owned reinsurance companies that the opportunity for them to be able to tap into the alternative capital markets, be it through ILS or other such structures, will enable that wonderful pot of capital to have a much closer relationship with the ultimate risk buyer,” said Schofield.

He continues to note that this approach has been attempted a number of times already, and while they did fail it’s certainly an area that he believes the market is now ready for, and will ultimately be successful and beneficial.

PORCs are vehicles established by intermediaries and brokerage companies that aggregate their clients risks, enabling small, to medium sized (SMEs) companies with access to underwriting profits that would otherwise flow into the insurance and reinsurance industry. In this way they act like a co-mingled or pooled captive vehicle.

“It also allows those producers, those brokers, to drive alternative solutions into their client base, rather than perhaps some of the more esoteric alternative solutions being the domain of the larger buyer. They suddenly become much more available to the small and very small organisations that are buying their insurance now. It also allows those brokers to drive risk management into the core of each of those individual customers,” explained Schofield.

Fellow panellist Mark Helyar, Of Counsel at law firm Bedell Cristin, also highlighted the potential of the PORC space; underlining that within the captive insurance space it’s a “major growth area.”

Adding that a comment from the 2016 meeting of the reinsurance industry in Monte Carlo, which described ILS as having uberised the reinsurance market, is where Guernsey needs to be as a domicile. Facilitating technological advancements and market innovations in order to bring together the investment side and the transformer side, at the same time.

“And I think if you bring those two together you can probably cut out about 4% or 5% of the margin that’s being wasted in administration,” continued Helyar.

Improving efficiencies and realising potential cost reductions is something of importance to all types of companies across varied industries, and utilising a captive, or similar, can be an effective means of risk management.

However, for companies too small to be able to establish a captive or protected cell company (PCC), for example, PORCs facilitate the grouping together of these smaller companies into larger programmes, essentially providing them with the benefits of the captive and reinsurance markets that were perhaps inaccessible.

“All of the Coca Colas of this world, the BPs and the Shells and everybody, have got their captives already, so if you want to get into another sector, then it needs to be in SMEs,” explains Helyar.

Schofield also suggested that corporate capital was likely to be attracted to the PORC approach as it can increase control and result in improved recognition and reward that is sometimes not received by primary insurers.

“Secondly, we’ve seen examples where we see the primary insurance market trying to exert control over the structure of the programme without necessarily thinking about how that could detrimentally impact, or positively impact the underlying purchasers. By putting everything into their producer owned cell, they start to take back some of that control,” said Schofield.

The panel clearly feel that growth in the captive insurance marketplace will be driven by innovation and evolution surrounding the use of PORCs for SMEs and, with the abundance of diversifying and willing ILS capacity in the capital markets a potential source of funding, it’s possible that third-party capital will be able to get closer to the ultimate risk buyer, via the growth of PORCs.

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