Anders Esbjörnsson, NCC Insurance.
Captives have a natural advantage over commercial insurance companies due to the intimacy of their relationship with their client and owner. But they should never take that relationship for granted, and should prioritise customer service and communication the way a business would with any other customer, says Anders Esbjörnsson of NCC Insurance.
Life 100 years ago was riskier than it is now. Life expectancy was shorter, and the list of diseases considered fatal was longer. From a business perspective, however, the picture looks different. Risk has become far more complex than it used to be.
New risks have emerged where they did not previously exist: 30 years ago little thought was given to personal information security, but now safeguarding private information has become a top priority for most businesses. The growth of intangible assets has been a key driver in this increasing complexity of risk: locking gold in a safe was relatively easy compared to protecting data online.
“Risk is always changing, and the better an insurer understands the business of its client, the better positioned it is to manage those risks effectively.”
Intangible assets present particular challenges around valuation. The value of data is less obvious than the value of gold, and more subjective. The maximum loss for a factory can be estimated with a high level of precision, but how do you come up with an estimated maximum loss for an IT-driven process? Understanding how data should be priced is a huge challenge for the modern corporation.
Risk is also far more interconnected than it was, making it impossible to think about risks in isolation. This means risk constantly reveals itself in unexpected ways.
These changing characteristics of risk require enterprises, brokers and insurers to work together more closely, so that all industry stakeholders can better understand their exposures.
The evolution of the cyber market illustrates how the insurance industry gets to grips with emerging risks. In the early days, insurers offered cyber coverage without themselves or their clients really understanding exactly the exposures being managed. Over time, as claims data built up and the risk became better understood, policies became more precise and pricing came to better reflect the underlying risk.
The industry will go through the same process as it comes to terms with the challenges of insuring other intangible assets. Different sectors, and even different companies within the same sectors, have very different risk exposures when it comes to intangible assets. Providing suitable insurance to meet the individual needs of customers will require insurers work closer than ever with insureds to produce tailored solutions designed to match their specific risk profiles.
In the spotlight
This trend puts captives at centre stage. In a world where effective risk management requires ever-closer cooperation between insurance companies and their clients, insurance companies that are owned by their clients have a distinct advantage. A well managed captive will have better access to data about its owner, and a better understanding of its owner’s business and risk exposures, than a third party insurer ever could.
Unfortunately, not all captives are well managed enough to exploit this opportunity. NCC Insurance, the captive for NCC, the Swedish construction company, was itself an example of such unfulfilled potential.
NCC Insurance was established in 1989 as a pure tax play, to create the most tax-efficient structure possible for the group. When it was first created this made sense. Over time, however, the insurance and captive landscapes changed, and NCC insurance failed to keep up. It did not leverage the detailed information it had about NCC, or the close relationships that existed between the two management groups, to provide better, more tailored insurance coverage. It was providing off-the-shelf solutions when it had the information it needed to create bespoke products.
NCC Insurance had skilled employees, from underwriters to claims handlers, but there was a lack of communication between the insurer and the client to make the most of these talents. It was failing to offer its client advice about what risk it should retain and what risk it should insure, or to provide quality support when it came to making claims. NCC Insurance had forgotten that as well as being an insurance specialist, it was also a support function for the group.
This made the captive largely irrelevant to the operation of the parent. Over time, tax planning became less of a priority to NCC management. The captive had to justify its existence, to convince management it was worth keeping it in place. That it found itself in this position was no surprise, the only surprise was that it had continued to operate so long without delivering real value.
NCC Insurance might have liquidated, had it not worked hard to make itself an intrinsic part of NCC’s risk management strategy. This entailed a fundamental change of mindset, and an acknowledgement of its role as a support function within the broader group.
It shifted the relationship between NCC and NCC insurance from one that was almost adversarial, to one that is characterised by cooperation. It remembered that its function was not only to insure risk for NCC, but to advise NCC about how best to execute its risk management strategy. It started to treat NCC the way a commercial insurer treats its customers in a competitive environment, where poor service leads to loss of business.
This was not an easy change to make. The construction and insurance industries can both be very conservative, and making such fundamental changes to manager mindsets takes time. But NCC Insurance was committed to the change.
This all happened at a crucial moment for the captive insurance industry. In recent years Solvency II has increased the compliance burden for captives, the business case for maintaining the captive has become progressively harder to make.
It is a picture that can be seen across Scandinavia, where many captives have been liquidated in recent years, because the costs of complying with regulation outweighed the benefits the captives delivered. Now more than ever, a captive has to deliver value for its owner, or it risks becoming surplus to requirements.
Today, NCC Insurance has a much greater focus on the efficient management of its owner’s risk. It still retains risk on behalf of NCC, as well as transferring risk to the reinsurance market, but it has evolved also to be a resource that NCC calls on for advice, when management wants a better understanding of their risk exposures.
By leveraging the relationship between the captive and the parent, and spending more time listening to what the parent needed, it provided better insurance coverage. To the construction, liability and property coverages it already wrote, NCC Insurance has added new lines such as environmental impairment liability and D&O.
It has also invested in technology to build an even more intimate understanding of NCC’s risks, for example investing in a fleet of drones, and qualified drone pilots, to improve the surveillance of NCC’s construction sites.
Going forward, I am convinced NCC will use the captive more and more as it secures bespoke coverage at a price that truly reflects the risk being transferred. Risk is always changing, and the better an insurer understands the business of its client, the better positioned it is to manage those risks effectively. The hardening market will only accelerate this trend, as companies focus more on extracting value from their insurance relationships.
Just like all companies, NCC will need to take greater risks as its business continues to evolve and increase in complexity. Its captive is there to help it manage that increasingly complex risk.
Anders Esbjörnsson is group risk manager and managing director at NCC Insurance. He can be contacted at: firstname.lastname@example.org
Anders Esbjörnsson, NCC Insurance