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.


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.”


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 [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.


That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.


Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]