Marc Heiligers, Saskia Heikens, AkzoNobel
Managing the risk associated with AkzoNobel’s sprawling operation requires a significant amount of insurance. To help meet that demand, the company has a long history with captive insurance, as Captive International found out.
AkzoNobel was established in 1792 as a Dutch paints and coatings and chemicals company. Today it is one of the world’s biggest paints and coatings companies, with around 33,500 employees in more than 150 countries.
AkzoNobel currently has one active Dutch captive, but over time has had 19, mostly inherited as a by-product of AkzoNobel’s active mergers and acquisitions growth strategy. As well as its active captive, AkzoNobel has one legacy captive, which it took on as part of the deal in which it acquired ICI in 2008.
AkzoNobel’s global insurance programme is very broad, encompassing property liability, directors and officers, employment practices liability, terrorism, crime, construction and cyber, among other forms of coverage.
Insurance is procured centrally for the whole global operation; insurance is sourced locally only where it is a regulatory requirement in a particular market, as is the case in some countries for auto, workers’ compensation or environmental cover, for example in the US and the UK.
AkzoNobel’s approach to managing its insurance portfolio is illustrated by its corporate structure. The insurance management department operates as part of the broader treasury and pensions business, a team of seven people, spread across offices in the Netherlands and the US.
Marc Heiligers, director of insurance in AkzoNobel’s insurance management department, reports in to the treasury department, and is himself a member of the treasury management team.
“Having the risk and insurance function for the group centralised is an important part of our corporate strategy, especially in terms of our ability to use captives to structure our insurance programmes,” he says.
One advantage of a centralised risk management structure is that it simplifies the regulatory and compliance process. While many captives in Europe have complained about the Solvency II regime, which is often seen as heavy-handed in its treatment of captives, Heiligers says AkzoNobel has had few problems complying with the rules.
“We had a captive under the Solvency I regime, so we were well prepared for Solvency II,” he says.
“We implemented all the necessary provisions of Solvency II, with the help of consultants and with effective use of outsourcing. There is some hard work associated with setting up a captive under Solvency II, but once the captive is operating and the structures have been put in place it is not a problem for a company with our scale.
“We are also lucky in that we deal with the Dutch regulator, which has dedicated captive insurance supervising teams which are very helpful and really understand the captive business.”
Not a tax play
Captives are not, Heiligers insists, about tax efficiency.
“Captives are a risk management tool, and are about control,” he says. “That has changed over the last 30 years. There used to be a tax incentive for having a captive in Europe, but there is no longer a tax advantage for captives.”
Saskia Heikens, captive and financial manager at AkzoNobel, says there are two main advantages from having a captive: self insurance and control.
“AkzoNobel self-insures the most expensive parts of the company’s coverage requirements, which saves money because the premiums are in general lower than they would otherwise be—especially now that the market has started hardening,” she explains.
“The other important advantage is control, especially around claims handling,” she adds. “Having our own skin in the game has allowed us to more effectively manage claims, which in turn makes the company more willing to take risk on to its own book.”
Having a captive creates a significant incentive to minimise claims, explains Heikens. As a large corporation with a sizable balance sheet, AkzoNobel can absorb a significant amount of risk on its own balance sheet, and the captive provides a convenient way of managing that.
Where AkzoNobel buys external insurance, part of these insurance programmes can be returned to the captive as reinsurance.
Heiligers says: “It is easier to reinsure large amounts of risk at once, which is one reason why AkzoNobel manages its risk and insurance purchasing centrally.
“As a general rule, the more frequency and severity there is around claims, the more likely we will want to put it in a captive.” Saskia Heikens
“It has not always been that way. Because of the acquisitions the company has made, at one point risk management was decentralised. But we realised most of our risk was liability risk, and if we brought it all together and managed it centrally, that would create large cost savings.”
Centralised risk management is, Heiligers says, the first step in developing an efficient captive strategy.
“We review all our coverage at least once a year, which is the regulatory requirement, but more often than that if circumstances require it. We review the entire insurance portfolio, our limits, what is in the captive and what that means for risk management, for Solvency II and as part of our Own Risk and Solvency Assessment (ORSA), and we conduct stress tests.”
This rigorous process is applied across the whole business and the range of insurance risks AkzoNobel faces. For each risk, it considers the coverage that is available, deciding in each case whether that risk is best managed through the captive, or via the commercial insurance market.
The risk is assessed in terms of the frequency and severity of the claims associated with that risk, which is set against the company’s own risk appetite.
Heikens explains: “As a general rule, the more frequency and severity there is around claims, the more likely we will want to put it in a captive. Frequency of claims is especially important, because it gives the company a much better understanding of the risk.
“Without frequency of claims it is very hard for the captive to accurately see how much risk it has taken on. Commercial providers have more customers which gives them more data and more insight around risks with infrequent claims.
“For example, property damage and business interruption were, at a certain time when we still had chemicals activities, both risks with a high frequency of claims, meaning there was much to be gained by managing that business through the captive.”
AkzoNobel does not believe it is always the best or cheapest approach to run a line via a captive. Administration components, claims control and central management all have to be taken into account. The company once managed insurance related to transportation through the captive, but this changed once a review revealed that it would be cheaper to buy marine and transport cover from commercial insurers, Heiligers explains.
AkzoNobel currently buys cyber cover from commercial providers, but with current developments in cyber it could be interesting to investigate involvement of the captive in the mid to long term, he says.
“In a hardening market and increasing worldwide cyber risks, it could get quite expensive, and it could make sense for AkzoNobel to take a chunk of cyber risk itself in the captive,” says Heiligers.
“An alternative could be to choose for a plain increase in deductible. Certainly, for corporate programmes the latter might be an effective solution, as ultimately captive results consolidate up to the corporate level as well.
“That is what it is about: evaluating what is the best opportunity given a certain situation. Captives, external insurance and non-insurance or increased deductibles or combinations: you need to have insurance professionals within your organisation who are able to pick what best fits the company needs.”
AkzoNobel is looking at other new opportunities for its captive, says Heiligers.
“It could be interesting to take on risk that is a business enabler, such as providing guarantee products. That is something we could do through the captive if we believe it will allow us to sell more paints.”
In 2018 AkzoNobel carved out its chemicals operation and sold it to Carlyle. The move was significant for the whole business, including dramatically changing the nature of its overall risk exposures. The larger a company’s balance sheet, the greater its ability to hold risk in a captive. With the size of AkzoNobel’s balance sheet reduced by around a third, the group had to review the amount of risk it was keeping on its own balance sheet through the captive.
Heiligers recalls: “When we carved out the chemicals business, AkzoNobel was a €15 billion company, and chemicals represented around €5 billion of that. We conducted an ORSA to calculate the risk and cost of managing that through run-off.
“As a paints and coatings company, we want everything to be focused on supporting and enabling that business. We wanted to get rid of any legacy business that did not directly support that business, which we saw as a distraction in terms of our attention and money.
“We merged the different legacy lines of business and got rid of anything that wasn’t core. Aggregating the businesses was efficient from solvency and capital perspectives.”
AkzoNobel had already been consolidating and divesting its suite of captives, notes Heiligers. “When I joined the company nine years ago there were eight captives,” he says.
“Through transfer, divestment and liquidation, that was brought down to three and in mid-2019 we divested another to get it down to two—one active and one legacy.”
Heiligers admits AkzoNobel has not yet decided what to do with its remaining legacy captive. “We want to find the solution that requires the least administration and regulatory cost for the company,” he explains.
While AkzoNobel is enthusiastic about the role captives play in helping it manage the risk of operating a large multinational company, Heikens warns companies should not see captives as a short-term solution to a problem such as rising rates.
“Captives make you more flexible, but companies should not be creating captives only as a solution to the hardening market,” she says.
“Markets harden and then soften in cycles, but creating a captive is a long-term commitment, and should therefore be part of a long-term strategy. It shouldn’t be about filling gaps in your insurance programme, either.
“Creating a captive should always be a risk management decision, a decision about the best way to manage risk.”
Marc Heiligers, Saskia Heikens, AkzoNobel