Jimmy Hussey, consultant, Aon
5 December 2019

Add value to captives with benchmarking

Everywhere we look in our day-to-day lives, we are inundated with statistics and information. There is a constant interaction with data and analytics. Do eight out of 10 dentists really recommend that toothpaste? Do we care? Probably on some level, we should.

“Benchmarking analysis can help in the early exploratory examination of the feasibility of a including particular risk in a captive insurance programme.”

Isn’t it more important to establish the credibility of that statement? If we could confirm the viability of that information, would we be more inclined to listen? Probably on every level, yes.

Presenting digestible data to begin a conversation is now central to much of what we do. Across sports and industry, graphs and imagery give us insights that present us with options, encouraging us to fully engage. It allows us to compare ourselves or others.

Aon has embraced this evolution across the entire business. Harnessing data and analytics underpins delivery of service.

The captive insurance industry is teeming with data points that are utilised to derive very specific analysis. However, until relatively recently the concept of presenting the moving parts of the industry in a digestible manner was a relatively new concept.

Do nine out of 10 energy captives write property or casualty risk? Do we care? The answer is yes, somebody does.

Obviously, the owner of a captive insurer operates within a more sophisticated purchasing environment than the average punter on the street, but establishing a benchmark against which to measure yourself is important to everyone. Captives owners are no different.

The Aon approach to captive benchmarking

Aon, as a global leader, manages just under 1,400 insurance entities, comprising a mix of single parent captives, protected cell captives and other special purpose vehicles. Globally there are approximately 6,300 captive insurers. It is therefore a reasonable starting to point to extrapolate when examining industry trends.

For over eight years Aon has been undertaking benchmarking analysis of how the captive insurance industry is structured. Before that there was an empirical understanding of how captives were being used, but a rounded data-driven view of the industry existed only in limited formats.

Aon wanted to deliver a greater understanding of the captives industry to its clients and provide meaningful insights that can help drive strategic decision-making.

It has borne fruit. Conversations supported by data are incredibly powerful. Our captive benchmarking tool allows us to present data filtered by industry, geography and parent size in an aggregated and anonymised way. It is a great way to engage with captives owners.

What is the value to captives owners?

The final decision on incorporating a new risk will always involve robust analysis but benchmarking analysis can help in the early exploratory examination of the feasibility of a including particular risk in a captive insurance programme.

Captives owners are inherently innovative in their approach to risk, always looking for new ways to get the most out of their captives. However, when an owner is considering a new risk, they often ask whether we are seeing other captives owners adopting a similar approach. Our analysis indicates that since 2012, captives are increasing the numbers of risks being written, from an average of 2.02 in 2012 to 2.12 in 2018. That gives confidence to those that are looking to expand the use of their captive.

Sitting down with a risk manager/captive owner and being able to show how many of their peers have a certain type of risk in their captives opens the door to wider conversations around captive insurance usage. There is a recognition of the value of learning from the wider industry and our analytics allows us to support that.

So, while captives owners are innovative, they also take some comfort from knowing they are not the first to take a particular risk into a captive. If a captive owner from the technology industry is considering bringing general liability cover into its programme, and Aon confirms that 57 percent of their peers already provide that cover, it can make them more comfortable about taking the next step. The fact that the data is drawn from Aon-managed entities confirms it has expertise and experience in supporting the management of that type of risk.

Clients have also derived value from seeing their own programmes reflected in the wider data. A captive owner from the life science industry recently wanted to understand the top 10 risks included by its industry peers. Looking through the data, the client noted that its captive aligned with the industry norm, which again provided a level of comfort that validated its approach.

Individuals responsible for captives within a group have drawn on captive benchmarking data to help support their conversations internally. Whether that is a CRO discussing total cost of risk, or a CFO engaging with a CEO on the costs of capital, the insights gleaned from the data can be used to help frame the dialogue.

Being able to provide meaningful insights in relation to how industry peers are utilising their captives can be a tremendous source of reassurance when examining current performance and new opportunities available.

What is the value for captive insurance candidates?

Outputs are also relevant to potential captive owners. Those entities that have established mature risk management process with a developed centrally managed insurance structure are also keen to understand what the practical implications of setting up a captive are before taking that next step.

Using our data and analytics, Aon has developed a framework that highlights the characteristics of captives, where captives are domiciled, the reasons for owning a captive, how a captive entity is structured and the value to be gained from captive ownership. Armed with this information clients can then look to engage in a more sophisticated assessment of how their own risk profile could be impacted by a captive.

This approach removes the “black box” view of captives. We can, in a transparent manner, provide a visual analysis of the industry to help drive strategic decision-making.

Potential new captives owners ask where the captive should be set up. Aon can demonstrate the profile of captives across different domiciles. In some instances, country interests will take precedence: when working with a French company for example, data shows that 77 percent of French-owned European captives are located in onshore European domiciles, which can help focus the conversation.

The point is that by using a tool, there is an opportunity to be flexible and targeted in terms of how that information is delivered. While we use static outputs to demonstrate the broad message on the industry, an analytical and client-focused report provides much more value.

What is the value for Aon?

As a market leader, Aon has an obligation to maintain a strong understanding of the industry in which it operates. Through understanding the market, Aon can respond to the needs of clients but also position itself to adapt to the changing market place.

There is an even simpler answer: the market demands it. Captives owners need to understand the performance of their captives. Are current methods of measurement of performance appropriate? Is there a better way to understand how much bang for your buck a captive is delivering? Benchmarking won’t have all the answers, but it will have some. That can be enough to be a differentiator.

In recent year captives have endured a challenging environment with increased regulation, and a soft insurance market combining with low interest rates. However, there are now signs that the prevailing macro environment is repositioning itself.

With most corporates experienced spikes in pricing at recent renewals, the captive insurance conversation is becoming increasingly relevant. When that happens, a market benchmark could be a great place to start.

Jimmy Hussey is a consultant at Aon.