Boards want greater comfort around governance and audit trails in response to regulation

Corporate boards are increasingly focused on obtaining “a governance and audit trail” around risk transfer purchasing, based on “empirical evidence that that fits their organisation”, in response to potential regulatory scrutiny, according to Philippa Cartmell, senior managing director of GB retail at broker WTW.

Speaking exclusively to Strategic Risk, Cartmell observed that more of WTW’s corporate clients were seeking robust, data-backed audit trails to underpin risk transfer strategies – in part, driven by a desire to fend off any regulatory attention or board oversight that might question policy purchases.

She said: “More and more, [corporate boards] want a governance and audit trail about what they’re buying. They might understand their risk appetite intuitively, but they now want empirical evidence that fits their organisation.

“So, they want all the data run. They want every quantification tool and they also want it presented in a very digestible way to their boards. They want [a] very clear summary of what they’re buying [and from] where, a narrative about why and who they’re placing that [risk] with, where are the losses, are [they] buying optimally, and where [risk transfer could be] costing them too much. That’s very much the conversation that is emerging now.

“What the boards really, really don’t want is complexity just overflowing into their summaries. And so, once you’ve done all the data analysis, it’s [about] paring that back to a very digestible summary that means something to people.

“As the stakes get ever higher in terms of some of the catastrophe risk, about political violence, cyber, as those risk exposures get more enormous, boards want more comfort around audit.

“If the regulator came and said ‘why have you bought what you did?’ Or if the board come to me and [said] ‘why did my risk manager choose this basket of risks?’ [Companies] want the comfort that all the big items have been ticked off and that in a soft rating environment, that they’ve got [the] best bang for their buck too.”

Achieving the “best bang for their buck” has been a prominent trend for risk managers since the onset of the insurance market’s soft cycle at the end of 2024 – this is fundamentally where insurance capacity outpaces demand, meaning that premium pricing is more competitive and very much a buyer’s market.

Although this is overarchingly positive for risk managers steering their organisation’s risk transfer strategy, Cartmell acknowledged that soft market conditions do also pose a different set of problems – this includes, for example, retaining departmental budget for when the insurance market cycle hardens again, deciding whether to purchase higher levels of cover on existing policies, or considering whether to branch out into purchasing policies in new lines of business.

She explained: “Most corporate insurance buyers are seeing lower bills, which some are very grateful for. Others absolutely [are not grateful] because they know they’ll never get the budget back.

“If you’re sitting on a big saving in insurance spend, the best way is to reallocate that [is] to [buy] something that only lasts for a finite period of time and improves your risk. So, some are developing a lower risk appetite, building down their retentions, putting more into their own risk governance framework. Others are buying higher limits.

“Others are buying very focused ways [to reduce] their risk. So that might be researching different types of uninsured risk. It might be allocating capital to something entirely different. But that’s definitely the story that is playing out.

“If they haven’t bought cyber, or they’ve only been able to afford very little cyber [coverage], then they’re taking that opportunity to buy more and reassess where their big risk areas are.”

Desire for captives ‘ramping up’

Cartmell added that client interest in captives is “ramping up” despite the softer insurance market conditions – this bucks the traditional trend seen across the risk community, where captives gain popularity during harder market cycles.

“It’s interesting because we’ve often seen captives become more popular when the market really hardens and turns against you, when risks are so difficult to place in the external marketplace and it becomes so expensive, [corporates] think ‘right, we’ll turn to internal provisions’. But we’re not seeing that in the [current] soft market. If anything, we’re seeing the desire for it ramping up,” she continued.

In terms of why captive arrangements – when an organisation creates an insurance subsidiary to insure its own risks, rather than purchasing insurance policies from a commercial insurer – are gaining popularity right now, Cartmell attributed this to organisations undertaking “a total reassessment of risk”.

She explained: “It is people thinking very differently about [risk] and where they can really reallocate their capital to.

“The attritional losses in retail, [for] example, are going to [happen] year in and year out, however they’re funding those. Captives are, in some cases, just providing a very tax efficient way of doing that.

“I don’t think anyone really enjoys the dips and volatility in the marketplace in terms of rates and I think that’s what’s made some clients think ‘I can’t put up with this anymore’. Once the budget’s gone, the budget’s gone – if you’ve got a captive vehicle working with you, you can smooth that all out and you just don’t suffer that [volatility]. That’s another massive attraction for people.”