Asia Pacific Response to COVID-19 - Captive Market Lessons Learned

14 June 2021

Enterprise risk management remains a top priority for all businesses in the region as they continue to re-focus following the pandemic and the ensuing market conditions, says Alastair Nicoll, Regional Director, APAC – Captive & Insurance Management at Aon

A grey swan event is a term coined for a potentially significant event for which possible occurrence is generally accepted, but is considered unlikely. The COVID-19 pandemic is a prime example of a ‘grey swan’, and the lessons learned from the ways different regions have responded to the event will be critical when it comes to developing solutions to cover similar occurrences in the future.

Contingency planning and enterprise risk management (ERM) are disciplines that my team and I discuss daily with clients across the Asia Pacific (APAC) region, where the link between the resilience of a business and effective risk management is well understood. In respect of managing pandemic risk, this understanding has come from experience of epidemics in the past that risk managers had integrated into their forward risk planning strategies.

A serious challenge

The COVID-19 pandemic has presented a serious and disruptive challenge across industries, and while this challenge was no less for those operating in APAC, many companies had already factored pandemic risk into their enterprise risk management strategies.

This is clear from the results of Aon’s global COVID-19 Risk Management and Insurance Survey, wherein more than half (52%) of APAC respondents had a pandemic plan in place prior to the event, which was significantly higher than the international benchmark (30%).

Many organisations and governments in the region learned from earlier pandemic threats (SARS, MERS, avian flu and swine flu), and were better prepared as a result. Local regions moved swiftly to introduce robust circuit-breaker plans, and many had state-run track-and-trace technology already in place to help triage and track the pandemic.

As such, many countries in the region reported faring better on average than other parts of the world in terms of the speed of their pandemic response. Thanks to their robust planning and risk management, we have seen our clients manage the situation smoothly to date, with no captive closures or dramatic adjustments to their captive business models, as well as no material increase in Dividend requests and/or inter-company loan applications.

Business model disruption

That’s not to say it has been easy - indeed, APAC respondents identified business model disruption as a major shock to their operation. After all, the region is a large global exporter and home to many multinational corporations with complex supply chains - manufacturers and raw material producers - which Aon counts among its clients.

Macro-economic factors impact different clients at different times. For example, commodity prices are currently high which is positive for our mining clients, but others have suffered tariff hikes that have caused a negative impact.

Redeploying resources was identified as a priority in all regions other than APAC in Aon’s survey. This could reflect the higher percentage of manufacturing and trade sectors operating in APAC’s economy. It may also suggest that these organisations have identified the value of further efficiencies through redesigning operating processes.

New product development was also identified as a main priority for APAC respondents, a further reflection of the fact that companies here know they will also need to innovate to survive in supply chain and export-dependent markets.

While these external factors beyond COVID-19 have impacted companies in different ways, our clients have been able to maintain their business-as-usual plans throughout the pandemic. This must be the best test of any contingency plan.

Regulatory support

At the same time, financial regulators have been helpful and supportive. The Singapore regulator, for instance, is very hands-on and issues regular communications on anything to do with risk management, and quickly moved to remote meetings and electronic signatures - transforming normal practices overnight to enable companies to operate in this environment.

The clients I speak to in the APAC region are not resting on their laurels and are continuously horizon-scanning for how risks can be better managed, demonstrating the maturity of their risk management strategies.

Constant improvement

This drive for constant learning and development is again reflected in Aon’s global survey results, which revealed a consensus that more could still be done to better integrate corporate risk and insurance activities. In fact, 35% of APAC respondents to the survey reported that they had accelerated the review of ERM - higher than the benchmark of 29%, with 78% of APAC respondents intending to review business continuity strategies, against the benchmark of 57%.

Nearly half of the respondents to the survey said they would investigate the feasibility of a new captive solution in the future, and here on the ground we are seeing that come to bear with an increase in enquiries for alternative risk management structures. This demand is largely being driven by hard pricing and reduced capacity in the insurance market – rather than by the impact of the pandemic – with insurance buyers looking for new ways to reduce their total cost of risk.

Pandemic solutions

We are currently working with a number of large carriers on pandemic solutions that can be provided by captives with pre-arranged reinsurance capacity and policy conditions which could protect our clients if similar circumstances arise in the future.

Our view is to support clients with long-term risk management strategies, and captive or Protected Cell Company insurance programmes can be a way to make the transfer of pandemic risk (or the risk of other grey swan events) more affordable.

We are proud to have continued to work seamlessly with clients throughout the pandemic and are looking forward to continuing to support risk and business leaders as they evaluate major shocks in the future.

The experience of APAC organisations through COVID-19 demonstrates the value of adopting proactive approaches to grey swan events and to my mind, the fact that many of these companies identified improvement as a priority demonstrates a level of maturity in enterprise-based decision-making.

There is a strong recognition in APAC that preparedness and good risk management isn’t just about being resilient in the face of a major shock, but also recovering and learning from the event, then building back and re-focusing to emerge even stronger than before.

To read the full findings from Aon’s COVID-19 Risk Management and Insurance Survey, click here.