One of the largest fixed costs incurred by affordable housing providers is their cost of insurance. For most affordable housing providers this cost is renegotiated annually through a broker with associated uncertainty and lack of control over premium increases and availability of cover.
Is there a better way in which this could be managed so that it forms part of a housing provider's long term business strategy rather then being an annualized uncertain expense? This is where potentially captive insurance may provide a solution.
What is captive insurance?
Essentially it is a form of self-insurance under which risk is brought in-house. In its purest form, it involves a housing provider setting up a subsidiary to provide insurance services to its group. For smaller providers, wishing to spread cost, there is the possibility of using a group captive structure.
There are a number of potential benefits:-
- In contrast to a commercial insurance provider, the principal purpose of a captive is not to maximise shareholder profit.
- It is based on adoption of a long-term insurance strategy, better matching the long-term business modelling adopted by affordable housing providers.
- It lessens the effect of insurance market volatility.
- Potentially it allows for any underwriting profits generated to the re-invested into the housing provider's operations.
The use of a captive insurance solution necessitates the insured accepting a level of risk. In principle however it also provides the opportunity to access the reinsurance market to re-insure such risk.
This is not a straightforward option and can involve substantial up-front investment and management commitment.
The potential use of captives in the context of the UK affordable housing market is not new. Previous initiatives have struggled to reach traction. However, when one considers the overall cost of insurance to the sector as a whole, it may be worth revisiting whether in the current cost constrained financial climate this would be worth investigating.