Dialogue and information are key to meeting the challenges of the captive market. Al Rhodes of SIGMA explains how important dialogue is.
Being a mid-sized consulting firm allows each member of the SIGMA team to develop experience with the traditional lines of coverage as well as newer, cutting-edge coverages. This breadth of experience allows SIGMA to provide robust consulting to support the captive insurance industry.
In the captive area, SIGMA completes numerous actuarial reports and feasibility studies each year, and we also serve as a reviewing actuarial firm for multiple domiciles. As a result, SIGMA has developed ongoing dialogues with a wide range of captive regulators and captive owners. Through those dialogues, we are able to grasp the needs and challenges associated with the captive industry on a highly practical, realistic level.
We complement our consulting with an educational component that grants our users actionable knowledge on how to best implement analytics in the captive realm. These educational tools can be accessed through our online RISK66 portal, which includes documents and training videos on captive-specific topics and analytical tools such as Loss Forecaster (for loss projections) and LORAN (for loss run metrics).
Our staff is focused on educational efforts to assist captive professionals in effectively evaluating alternative risk transfer options in a complex insurance market. The SIGMA team strives to stay up to date on current or upcoming changes to the captive landscape and then relay this information to our colleagues in the industry. Over the last year, several team members have written articles on captive-specific topics, such as tracking changes to a captive’s actuarial reserve estimate and the most important ratios to evaluate when measuring the financial health of your captive. On top of that, our bimonthly Lunch & Learn webinar series has provided high-level overviews of various onshore and offshore domiciles to help our audience better understand the criteria to look for when comparing domiciles for their captive.
The response to these innovative efforts has been strong. In 2022, our educational webinars have averaged approximately 100 registrants per session. We believe that to navigate challenges, clients must first understand the analytics and approaches they already have in place, and this belief has been confirmed by the feedback received on our educational material.
Since the actuarial profession has ongoing continuing education requirements that help maintain compliance with current and emerging issues, our staff with captive expertise attend continuing education seminars on relevant captive regulation topics. For NAIC-related issues, SIGMA has a credentialled actuary with a regulatory background to help ensure compliance changes are understood and accounted for.
Analytics is the future
Looking at what we want to see in changes to the captive sector—beyond the annual actuarial reports required by regulators—we would like to see the captive industry integrate analytical solutions into ongoing decision-making strategies. To help create this environment, SIGMA staff assist clients in understanding how captives can be used as a long-term strategy, as opposed to a short-term solution to current market conditions. Our approach gives clients access to educational resources, consulting, and software tools to navigate the challenges of creating a sustainable, long-term captive approach.
Companies are normally required to complete pro-forma analyses as part of the feasibility process during captive formation. Our approach encourages clients to use the analytics created during this step in a strategic, continuous process. Scenario testing, advanced pro-forma modelling, and stress tests are all examples of analyses that benefit captives on an annual basis.
Ultimately, the captive industry should focus on continuous improvement through experience and innovation, and these aspects can only be produced by professionals who have spent a substantial amount of time within the evolving captive landscape. By guiding our clients through the analytical steps necessary for a long-term captive solution, we can play a role in building an increasingly innovative industry.
Looking at growth opportunities, SIGMA felt an immediate and strong interest from clients for analytical assistance in navigating the effect of the COVID-19 pandemic on workers’ compensation, medical professional liability, and other casualty risks. We have seen a significant increase in interest in captive formation due to the hardening market. Since the state of the market has been exacerbated by COVID-19, more companies are exploring alternative risk transfer options.
Alongside this, it appears that carriers in the traditional insurance market are beginning to withdraw certain environment-related offerings, a trend that could become more prominent in the future. Companies throughout the industries impacted by this trend will likely have to prepare for a future determined by the environmental, social and corporate governance (ESG) framework, which may result in a wave of renewed interest in captives.
SIGMA has done significant research in windstorm and property analysis and developed a database related primarily to wind events in the Atlantic and South-eastern US. This information supports captives in the evaluation of various parametric wind and property deductible buydown products. Parametric policies are challenging because the structure and trigger may change at each policy expiration, and the underlying risk is difficult to analyse.
The most commonly referenced topic in the realm of emerging risks is that of cyber. Our continued analysis and growing compilation of relevant data and information has provided SIGMA with a unique opportunity to offer innovative approaches to the placement and pricing of this risk. We believe those innovations may benefit prospective and existing captive owners who are struggling to grasp the nuances of handling such wide-ranging and potentially volatile risks.
Finally, as the captive insurance sector continues to become a popular option for insureds, it seems likely that more companies will seek to form or join a captive without fully grasping the parameters necessary for a healthy, long-term captive experience.
To give an example, many potential captive owners may want to exit the traditional marketplace because of increased pricing—but often, that pricing is directly related to increased costs and variability related to the risk, making it difficult for an owner to retain and finance. An actuarial report analysing adverse scenarios may indicate that a captive is not the appropriate insurance programme to protect the company against specific adverse events.
If the metrics (such as total cost of risk) at the adverse level indicate additional funding requirements and the parent is unable to take on that scenario, then a captive is not a viable choice.
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