2222222222

Captives

New Ways to Use Surplus

There is a move toward captives’ strategic use of surplus to fund risk management-based projects, analytics, consulting and more.
By: | November 1, 2017 • 5 min read

Surplus produced by captives traditionally found a use in taking on additional limits, writing new lines of business or funding loss control. But as more captive owners start to write emerging risks such as cyber, supply chain and terrorism, there is a move toward using surplus to fund a variety of risk management-based projects and analytics associated with these risks.

Advertisement




With most mature captives accruing surplus from multiple years of positive underwriting performance — most notably financial institutions, which stood at $40 billion in 2016, according to Marsh — that trend is only going to accelerate.

In the last year alone, surplus use extended to initiatives to determine capital efficiency and optimal risk retention levels in the form of risk finance optimization, quantify cyber business interruption exposures, accelerate the closure of legacy claims and improve workforce and fleet safety/loss control policies.

One major U.S. retailer, whose workers’ compensation program reported deteriorating loss experience at the same time the company was grappling with a large-scale acquisition, used its captive’s $50,000 surplus to fund additional external safety and loss prevention consulting in order to boost its internal resources.

Building on that, the surplus was used in subsequent years to fund additional risk consulting services.

“Surplus has become part of a much larger debate around data, customer information and how that can be used to maximum effect,” said Ward Ching, managing director, Aon Captive & Insurance Management.

“Clients are now asking strategy-related questions about business growth, product-service mix and market penetration, and captives are at the heart of that because they hold much of that data and the analytical capability to achieve a lot of those things.”

Central to Risk Management Strategy

Ellen Charnley, president, Marsh Captive Solutions, said companies increasingly put their captive at the heart of risk management and risk finance strategy, going beyond the financing of traditional property and casualty risks.

Ward Ching, managing director, Aon Captive & Insurance Management

“This means that the captive isn’t simply doing what it maybe historically did 10 years ago, just funding for the retentions and deductibles,” she said.

“Now it’s looking to potentially take on greater risk and to reduce the amount of commercial insurance risk transfer transaction, for example, in buying commercial insurance.

“Also, companies are looking potentially to structure deals whereby there’s much greater retention in the captive and buy higher level coverage to protect the captive through the reinsurance market. That structure is one a lot of companies, particularly the larger ones, are looking for as they get more comfortable in retaining risk, and in that respect, the role of the captive and the risk manager has been elevated.”

In terms of surplus use, Charnley said that captives are increasingly being used to fund analytical work focused on retentions.

“There’s more sophistication with respect to analytics and the captive’s role to play in that,” she said.

“The cost of that analytical project work is now being borne by captives using their potential profits and surplus they have developed over the years.”

Another example, said Charnley, was using a captive to fund an actuary who can understand, predict and quantify a company’s known risks. The surplus can also be used to fund analysis of the company’s existing book of claims in order to speed up claims closure and where necessary, to challenge claims adjustors, ultimately lowering the cost of risk in the long run, she said.

Advertisement




“Predictable risk is always an area for companies to try and improve upon, so through loss control activities, for example, the cost of workplace environmental changes, to try to reduce workers’ compensation exposures and ultimately claims, can be borne by the captive,” she said.

“The captive, in turn, would benefit from a reduction in claims in addition to those of the parent.”

Sean Rider, managing director for consulting and development, Willis Towers Watson’s Global Captive Practice, said he has seen a trend toward using captives to fund more sophisticated analytics around risk finance optimization.

That includes the use of analytics to understand the optimization of their risk financing programs, he said.

“Captives for large global corporates are coming into their own as a repository for retained risk and a hub for executing risk financing programs that rely on the company’s balance sheet to manage the lion’s share of the organization’s risk portfolio,” he said.

Ellen Charnley, president, Marsh Captive Solutions

“To have a rational approach to running such a risk financing program, they need to have a robust analytical basis to their decision making.

“This is further supported by the re-emergence of the integrated marketplace in alternative risk transfer and the refocusing of large corporates in terms of optimizing their risk transfer/retention program.”

Jason Flaxbeard, senior managing director, Beecher Carlson’s Captive Services Practice, said some companies were centralizing their risk by using the surplus from their captive to finance their risk management team. Another use, he said, was paying for risk inspections and engineering visits for those captives that write property.

“We also have some clients who now want to use their surplus to take on enormous chunks of their own risk,” he said.

New Risks

Another area in which surplus is being deployed is in writing non-traditional emerging risks. Nancy Gray, managing director, Aon Global Risk Consulting, said cyber is one such area.

“Going down this route allows companies to potentially increase their retentions and be more flexible in how they want to structure their insurance programs,” she said.

“Clients are now asking strategy-related questions about business growth, product-service mix and market penetration, and captives are at the heart of that.” — Ward Ching, managing director, Aon Captive & Insurance Management

“Increasingly, there is also an opportunity for companies to extend beyond their own P&C risks and take on their customers’ risks through their captive program.”

Courtney Claflin, executive director of captive programs at the University of California, who manages two captives, said the university is using the original captive to fund a grant program for risk management and safety needs.

Advertisement




“We can play a role throughout the university system by creating a grant program to help individual departments or campuses that need funding for specific projects like campus security,” he said.

“The grant program allows them to write a grant proposal to the captive and then we can use the captive surplus to fund that grant.”

Ian Davis, the State of Vermont’s director of financial services, said companies are increasingly looking at new and innovative ways to deploy the surplus capital from their captive.

“The trend I see is that some captives have built up such a large amount of surplus, that they do studies to determine the appropriate use of and place for the capital in their organization,” he said.

Charnley added, “Surplus is another compelling value proposition that captives provide that perhaps otherwise would be lost in the parent company’s balance sheet. Having a separate pot of money that can be used in this way can be a tremendous benefit to a company.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

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.

Advertisement




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.”

Advertisement




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.

Advertisement




“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 [email protected]