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14 March 2017Analysis

Five niche risks perfect for captives

The setting up of a captive insurance company can potentially provide more options to managing their risks by letting them define their own insurance programme.

Captive International spoke with Robert Geraghty, business development manager for EMEA and Asia Pacific at Marsh Captive Solutions, who laid out five niche risks that captives may be better suited for.

1. Medical/prescription (Rx) stop-loss
Captive insurance companies can play a pivotal role in helping to design and structure an innovative health care self-insurance programme, says Geraghty.

Self-insurance, such as captives, could allow organisation to ‘rethink’ how to manage stop-loss risk as well as lower costs, he says.

Stop-loss coverage products protect employers from paying excessive claims, either for medical only or including prescription medication.

For example, a single parent captive is one option for a large employer to consider, as Geraghty suggests it has the potential to reap the benefits of underwriting profits based on its own loss experience, as well as provide greater flexibility in designing the right coverage.

By contrast, Geraghty says utilising a group captive facility can be a great solution for a smaller employer.

“Under either option, a captive will allow the employer to pre-fund expected losses via premium payments and participate in various layers of the risk while still limiting the overall risk,” he says.

2. Political risk
Political changes or instability in a country can have adverse effects on an investment’s returns or affect the profitability of a business, so minimising and managing these exposures will be a high priority for many.

In these scenarios, captives may provide cover for countries where coverage is either unavailable in the commercial market or is too expensive, says Geraghty.

In line with the changing global risk landscape, Marsh has seen a large rise in this risk being insured in captives, with a 58 percent increase in the past few years.

3. Cyber
For the unpredictable and volatile nature of cyber risk, there are often gaps in traditional insurance policies that do not meet the needs of a company.

Furthermore, a captive covering cyber may provide access to higher limits and more comprehensive coverage for these growing risks.

“Cyber risk is now a major boardroom concern, which is reflected by a large increase in companies writing cyber into Marsh-managed captives in recent years. New and existing cyber liability programs embedded in the captives we manage have grown by 160 percent globally in the last four years,” says Geraghty.

In fact, Geraghty suggests using a captive to cover cyber risks can offer numerous benefits, such as the reduced volatility of retained losses and less balance-sheet impact by segregating funds in the form of premiums to pay potential losses.

A captive would also allow the capturing and quantification of all loss costs versus expenses within the retention being siloed among the various claim stakeholders – such as the case with IT, legal, public relations, risk, finance, customer service.
Geraghty’s final reason is that market pricing may be cost prohibitive and the parent company might find retaining the risk a more efficient use of capital.

4. Employee benefits
The cumulative costs of a decentralised approach to employee benefits can be significant for multinational companies with large workforces, according to Geraghty.

More efficient systems have been introduced by companies by consolidating contracts with insurance companies operating pooling networks.

To further reduce the costs and increase control, captive managers such as Marsh assist a growing number of companies who are using captives in multinational employee benefits funding arrangements providing many economic, data management, and control advantages.

5. Supply chain risk
Against a backdrop of advancing technology and off-shoring in emerging economies, global supply chains are grow more complex, and also more vulnerable, according to Marsh.

Marsh statistics suggest captives have recently shown a large uptake rate for supply chain risk, which has increased 133 percent in the past year.

Supply chain is considered non-property-damage business interruption, which could, for example, result from global weather events and has the potential to affect a business halfway around the world, says Geraghty.

Examples given include the Thailand floods in 2011, the Japan earthquakes and tsunami of 2011, and Superstorm Sandy in 2012.

“All of these extreme weather events shared common elements in that they were examples of how a captive that was well established, capitalised, and operated could provide security to its owners,” Geraghty concludes.

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