Changing times, changing captives

07-05-2020

Changing times, changing captives

Adam Miholic, Hylant

As the global economy and infrastructure continue to weather what feels like more and more storms, many companies find themselves in the middle of cost containment and restructuring strategies. Taking on more risk during these disruptive times may seem counterintuitive, but organisations with existing captives or plans to launch them are doing just that, says Adam Miholic of Hylant.

Captives have been a staple in the insurance and risk management industry since the 1960s, with some of the most impressive growth occurring in the last 20 years. Within this same time period, the insurance industry has seen numerous cycles of hard and soft markets. Meanwhile, the global economy has dramatically shifted and insurers have been exposed to emerging risks—seemingly every few years.

It should be no surprise that those internal and external market trends have caused organisations to continuously evaluate their total cost of risk, and how they plan to finance the impact of large, unforeseen losses. For organisations that have chosen to self-insure all or certain elements of their exposures, captives have been a vital tool to formalise and accrue for those unforeseen events.  

The more things change, the more they stay the same

Companies create captives for reasons as varied as the kinds of organisations that create them.

However, some of the more common themes include:

  • Formalisation of self-insured risks
  • Reducing the impact of market volatility
  • Tailored coverage for unique and specific risks
  • Exerting more control of the organisations total cost of risk
  • Creating a centralised insurance programme for multinational exposures

In my time helping companies to evaluate the potential benefits of a captive, while a company’s risks and exposures vary, the motivations for launching a captive vary much less.

“It is essential that captive owners evaluate their captives and determine whether there are additional levers which can be pulled to help adjust to the changing environment.”

Most companies cite at least one of the above elements as their motivation for exploring captive formation. This sentiment has been confirmed by peers who have worked in this industry much longer than I have. 

Whether it has been crop protection, executive risk, terrorism and geopolitical events, cyber breaches or a global pandemic, the foundational benefits a captive can provide to an organisation have remained relatively uniform and unchanged for decades.

 The only constant is change

Captives are ultimately a reflection of the risk management and loss prevention strategies implemented by their parent organisations. Given this, it is only natural that as a parent company changes or adapts to changes in its environment, the captive must also appropriately change.

During discussions with current captive owners, there are myriad reasons as to when and why an organisation institutes a business plan change for its captive. Many of the recurring responses include:

  • The need to more quickly and appropriately cover emerging risks and exposures
  • Market pressures and carrier capacity
  • The desire to offer third-party coverages to organisations within the company’s industry/network
  • A change in risk profile or organisational change.

The flexibility often associated with captive insurance companies is highlighted in the above responses, whether the change was necessitated by internal or external factors. Captives have historically been used in both soft and hard markets, as the operational benefits they provide are not always tied to financial metrics.

Being able to quickly fund for unique risks or access additional capacity are key motivators for many prospective captive owners. Those benefits don’t change once the captive is operational, and in fact often underline the value a captive provides to its parent company. 

As major disruptive events occur, such as the onset and development of the latest health crisis, it is essential that captive owners evaluate their captives and determine whether there are additional levers which can be pulled to help adjust to the changing environment.

The current volatility in the market is an example of the exact type of situation that captives are designed to support. Regulators expect captives to be used in various ways to assist their parent companies.

 


Adam Miholic is senior consultant at Global Captive Solutions. He can be contacted at: adam.miholic@hylant.com

Adam Miholic, Hylant

Captive International