Elizabeth Carbonaro is regional managing director in Willis Towers Watson’s global captive practice and Adrien Collovray is director of Willis Towers Watson Captive Advisory
While captives are often sold on the possibility of covering uninsured risks, they have historically primarily covered traditional insurance risks, such as property and liability risks. Captives have always been seen as a way to reduce the overall insurance spend of a company by allowing it to retain an element of risk that it is comfortable with, via the captive. This gives it access to the reinsurance market and hence a wholesale insurance price. Captives also give parent companies full control of claims and speed up the settlement process.
In recent years, however, captives are being looked at as an integral part of the enterprise risk management function within an organisation. More innovative risks are being placed into captives, such as employee benefits (EB), although to date only around 1 percent of captives cover this.
EB forms part of commercial insurance that is a legal requirement in a number of jurisdictions. In other instances, it forms part of a competitive compensation offering that can differentiate one employer from another. It continues to be one of the major overhead expenses for companies.
As a legal cover, it provides indemnity and medical expenses coverage for employees injured in the course of performing the duties of their job, without the burden of proof of negligence on the part of the employer.
As a pure EB cover it can cover employees for critical illness and death, not necessarily arising out of a work-related event. As such, many companies experience considerable claims activity, which is attractive to a captive as it provides additional support to its acting as an insurance company, particularly where it may otherwise focus on lower frequency risks.
The quantum of this EB premium, in addition to the property and casualty premium, aids the diversification of the captive. This additionally supports the insurance function and helps in achieving capital efficiencies within the captive itself.
Some of the more recent developments in the captive insurance world include the placing of cyber exposures, and even more innovative is talk about the placing of parametric or non-damage business interruption risks into the captive. Such opportunities are often bounded around fairly loosely, but the programme construction and transfer pricing do require some detailed consideration.
We are seeing a number of companies placing their cyber exposures into their captives. The primary benefit here is to have greater control over the programme design. A core component of any cyber risk strategy is around pre and post loss services. Some companies have established protocols for managing this risk and are resistant to external influence or conflict with insurer-preferred providers which may also extend to sharing sensitive data.
The captive permits greater control over these aspects while accessing capacity via the reinsurance market, which of course will still need assurances regarding the quality of risk control measures. Additionally, captives frequently act in a ‘difference in conditions’/‘difference in limits’ capacity to protect against coverage gaps in this rapidly evolving sector.
Parametric insurance does not indemnify the pure loss, but rather effects a pre-agreed and guaranteed settlement upon the occurrence of a triggering event. The triggering event is often a natural (weather-related) or unnatural (example civil commotion) event leading to a loss, often business interruption, where a direct physical loss may or may not have occurred.
An example of this may be a mine which is shut down due to an approaching storm, which subsequently changes path. The mine has not suffered damage resulting from the storm but has incurred a financial loss due to the precautions undertaken. Such events may ordinarily precipitate a loss or a series of losses, but in principle other traditionally uninsurable risks can also be covered or hedged through parametric insurance.
Given the guaranteed settlement if that event occurs, the claim process is smoother when compared to a normal claims process, as little to no backing information is required once the event occurs and the cash should flow relatively quickly to the company. Arguably the primary deterrent to captives for this type of cover is the fact that parametric insurance is not widely used, therefore contract wordings are not common. This is a disadvantage to the captive insurance world, where captives have traditionally followed tried and tested contract wording. While the market for such risks has increased in recent years this coverage is often seen as an expensive option. The captive therefore is an effective alternative in order to manage such risks.
The growth of distributed ledger/blockchain technology is increasingly providing new and innovative opportunities for captives where historically the administrative burden would have been prohibitive. Many opportunities are being seen within the company and mutual captive space which opens captives to mid-market and sociopolitical programmes.
Additionally, such technology is being used to enable more interactive risk management in real time, eg, does a vessel travel through troubled waters with increased risk and premium or incur the cost of take a longer route to avoid it? Such structures are directly engaging with the captive and influencing its retention strategy to support the core activities of the parent.
As we continue to develop our work with clients around the portfolio of risk (looking at insured, uninsured and uninsurable risk as a portfolio rather than in siloes) the captive is, and will increasingly become, the enabling tool for risk consolidation and hedging.
Elizabeth Carbonaro is regional managing director in Willis Towers Watson’s global captive practice. She can be contacted at firstname.lastname@example.org
Adrien Collovray is director of Willis Towers Watson Captive Advisory. He can be contacted at: email@example.com
Willis Towers Watson, Captives, Cyber Risk, Blockchain, Insurance, Reinsurance, North America