Captives

Captives Show Promise in Addressing Supply Chain Risk

Captives can serve as a primary-layer risk-transfer mechanism. They can also allow organizations to access reinsurance to cover difficult-to-insure losses.
By: | July 30, 2018 • 3 min read

A recent production shutdown of Ford’s flagship F-150 trucks following a fire at one of the auto manufacturer’s suppliers, is causing many companies to question how they manage and insure against supply chain risk. For a growing number of them, part of the answer is captives.

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With the growth of just-in-time manufacturing and global sourcing, supply chains are becoming more complex and vulnerable.

Meanwhile, dangers such as aging infrastructures, political instability, climate change, cyber threats, communications vulnerabilities and even reputational harm, threaten first-, second-, and even third-tier suppliers.

According to Nick Wildgoose, Zurich’s global supply chain product leader, investment in supply chain risk management has increased considerably since the global disruptions of 2011. Even so, he said, the level of disruption is still high, with 65 percent of corporations [reporting] a disruption in 2017.

Much of it is non-damage related, “so cyber, loss of talent, etc. It shows you need to take that holistic view of supply chain risk management.” Increasingly, that view includes captives, which not only serve as primary-layer risk-transfer mechanisms, but can also offer access reinsurance for difficult-to-insure losses.

Steve Bauman, Head of Global Programs and Captive Practice: Americas; XL Catlin

“We’ve seen it on a fronted basis, we’ve also seen on a direct basis,” said Michael Serricchio, managing director, Marsh Captive Solutions.

“It’s really no different than self-insurance, except you’re being more formal about it, you’re setting funds aside … you’re building up capital, whereby you can use that capital to hopefully avoid losses in the future. We have maybe five to 10 captives that are doing supply chain.”

Captives: Flexibility and Customized Solutions

Captives are flexible, said Brian W. Merkley, global director, corporate risk management, Huntsman Corporation, and well-suited for supply chain risk, which can vary greatly by industry and product and may not be adequately understood by the marketplace.

“Captives work even more efficiently when you have things that are outside the box,” said Steven R. Bauman, head of global programs and captive practice, North America, XL Catlin. “Certainly if there are gaps or deficiencies in that, that’s where the captive does very well.”

Captives can also be particularly useful to companies just beginning to address supply chain risk, said Wildgoose. “Captives can sit outside corporate budgets, so the captive can help provide budget for risk management,” he said. “It shouldn’t be the source of all the funding, but it can start like seed capital.”

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For some, an important benefit of captives is the access they can provide to alternative capital: “Especially now, with the blending of the insurers and the reinsurers and the capital markets, everybody wants … an opportunity to make money in this business on the back, and you see all these different sources of capital coming into the market,” said Gary Lynch, CEO and founder, The Risk Project, LLC.

“I’m not saying a captive is the solution, but a captive is a creative way of doing it and it allows you to think outside the boundaries of traditional coverages,” he said. “And potentially there are some tax benefits.”

For more mature captives, adding supply chain can be a natural next step.

“If the captive has been successful over the years, over the decades, and has the wherewithal to take more risk, that’s the perfect scenario,” said Bauman.

A Multifaceted Look

Still, said Merkley, there’s limited appetite for a dedicated supply-chain captive. “I’m hearing chatter about captives and their potential involvement in supply chain risks, but I am not really seeing anybody pull the trigger on any actual standalone supply chain risk policies,” he said.

The potential for overlap with contingent BI under a property policy is one reason why, said Serrichio. “You don’t want to have double insurance in the captive and in your property policy.”

Another is the potential for creating new gaps in coverage and how that aligns with all of the other policies in your program, said Merkley.

Bauman emphasized the need for caution. “It’s got to be a very measured and prudent use of a captive. So having a good partner in all this is important — folks that have seen it before and can assist with the pricing of it is also important.” &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at riskletters@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at riskletters@lrp.com.