1 January 1970Analysis

Risk management: a five-star strategy

In 1938, as the U.S. endured another year of depression, Minnesota entrepreneur, Curtis L. Carlson, founded the Gold Bond Stamp Company.

Building on the growing success of trading stamps, Carlson’s golden ticket was an early incarnation of the customer loyalty programs adopted by most of today’s major retailers. With sufficient repeat purchases from a particular store, consumers could earn enough stamps to buy anything from a set of saucepans to a mink coat.

As Gold Bond Stamps became a household name across the U.S. and Canada, Carlson Companies grew and in 1962, acquired its first hotel: the Radisson Plaza Hotel in downtown Minneapolis.

Over seventy years later, Carlson’s empire now includes more than 1,300 hotels and 900 restaurants in 150 countries and territories and a majority stake in Carlson Wagonlit Travel®, the global leader in business travel management. From the American casual dining restaurant T.G.I. Friday’s® to the sleek Hotel Missoni, Radisson Blu, Park Plaza®, Park Inn by Radisson and Country Inns & Suites By CarlsonSM hotels, it is one of the world’s largest and most respected hospitality companies, employing more than 170,000 people and generating systemwide revenues of USD 38 billion in 2011 alone.

Carlson’s ambition is to have segment leading brands and to be the number one hospitality company to work for and invest with. With this pursuit of unrivalled stability comes a cautious approach to finances. We spoke to Carlson’s manager, Risk Management, Steve Bujarski, on the benefits of running a captive.

In the beginning

Based in Bermuda, Carlson’s captive was incorporated in 1990. “The management team wanted to use a captive to help Carlson manage and finance its insurable risk in a cost-effective way,” said Bujarski, who has been with the company for 16 years.

“The initial set-up process took several months,” he added. There were not as many domicile options as there are now, so that decision wasn’t as difficult as it might be today, but a lot of research was done and industry professionals were consulted to analyse and evaluate exactly how a captive could benefit Carlson. The choice of domicile was based on the existing captive infrastructure at the time, and the experience and expertise of the captive management team.

“Ultimately, you have to do the best analysis you can and be able to make the case for your captive to the company’s management and owners,” Bujarski explained. “The process could vary dramatically based on the complexity of a parent company’s business operations and the goals of the stakeholders involved.”

Core principles

Carlson’s captive insures both casualty and property risks through its captive. “One of our guiding underwriting principles is that we willretain risk that can be reasonably evaluated by actuarial specialists,” said Bujarski. “We are pretty comfortable with these core lines, but we’ve also utilised the captive for speciality programmes such as travel insurance. The insurance programme adapts as the Carlson business changes and we’re always researching new opportunities to enhance the captive’s role.”

According to Bujarski, the captive participates in Carlson’s insurance programme only where it can be financially and strategically effective. “We coordinate the captive’s involvement with the coverage needs that are not fulfilled by the commercial markets,” he said, “and if commercial markets can’t respond effectively, then we turn to the captive.”

Trusting experience

While soft market conditions have left some captive owners considering a return to the commercial market, the impact on Carlson’s captive strategy has been limited. “We’ve made adjustments to our captive programmes in the past few years, but this has been more a result of our own risk analysis rather than market conditions or expectations,” Bujarski said.

“For example, we are always re-evaluating the insurance coverage and retentions that our captive insures. And in some cases, we have increased the amount of risk our captive insures. We did this during the soft market because our underwriting analysis indicated the captive could insure that risk at a lower cost than outside insurers could, or would. Market conditions are a factor in what we do with the programme, but I like to think our captive management team knows the Carlson business risks better than anyone else and because of that they have the ability to make sound decisions on behalf of the captive and its policyholders,” said Bujarski.

Responsible leadership

Bujarski believes that the key to any successful captive programme is an informed and responsible management team. “We strive to run our captive business prudently on behalf of our ownership and policyholders and I think we have been very successful in doing that. Having a great management team is vital, and having an engaged governance team that values the captive’s contribution has been key to its ongoing success.”

Regardless of market conditions, Bujarski remains positive about the future of Carlson’s captive programme and its role in helping the company become a first class choice for investors. “Having a strong captive provides options that we wouldn’t otherwise have—for example, the ability to access the outside reinsurance markets if needed,” he said. “And I’m happy to say that both internal and external reviews of the captive have supported its value to the company.”