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.

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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.

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“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.

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“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

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.

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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.

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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]