Increasing regulation, business diversification and difficult market conditions mean that it makes sense for captive managers to make the best use of risk technology. Angus Rhodes of Ventiv Technology explains to EMEA Captive how to identify and incorporate the latest technological advances.
Captive managers know all too well the pressure they’re under from their parent company to deliver value. This pressure is sure to increase when one considers the general conditions in which captives operate: plentiful capital in the commercial insurance markets; no sign of a hardening market; and new products being offered in the capital markets. Therefore to enable more effective management of their business and lower operational costs, now is an ideal time for captives to look at investing in technology.
Captives or their parent companies have already invested in a general ledger and associated tools to help with the filing of regulatory reports. Management of the captive-specific underlying technical entries, however, often remains in spreadsheets. As captives grow and diversify the business lines they write, including third-party business, they must still deliver efficient operations—and those spreadsheets become the weak link.
Facing the challenges
Information and data management sits at the centre of fi ve key challenges that captive managers face:
- Increasing regulatory and corporate governance requirements;
- Parent company financial reporting requirements;
- Providing data to actuaries and commercial carriers;
- Growing risk-management requirements; and
- Meeting strategic goals and parent expectations.
These challenges create an acute need for accurate and comprehensive information. Today’s captive must be very flexible in its use of data, not only to respond to reporting requests from its parent company, regulators and other stakeholders, but also to satisfy growing operational demands.
"THROUGHOUT THIS PROCESS OF ESTABLISHING CRITERIA, IT IS IMPORTANT TO CONSIDER NOT JUST THE TECHNOLOGY (SYSTEMS AND ANALYTICS) ELEMENTS, BUT YOUR MANAGEMENT (PEOPLE AND PROCESSES) AS WELL."
How technology can help
It helps to have a starting point when considering the use of technology. Based on our research, the following checklist highlights activity areas where technology solutions can create value for captives:
- Managing complex insurance programme structures, including fronting and reinsurance arrangements.
- Managing loss exposures, including understanding aggregate and reinsurance positions, with the handling of complex allocation of claims financials per participant re/insurer considering limits, aggregates, stop-loss and reinsurance/retrocession arrangements.
- Assuring legal compliance with Solvency II or its equivalent (specifically, supporting the reporting requirements based on legislation and standard audit requirements).
- Providing auditable financial transactions to cover all premium and claims-related activities and movements.
- Managing the flow of premiums, commissions and cash among corporate, captive, commercial insurers, reinsurers and business units, along with the ability to see gross and net positions.
- Supporting a variety of premium calculations and allocations covering premiums written to earned, proportional and non-proportional premiums per participant re/insurer, premiums for global programmes to business units or at a more granular level, including tax and fees.
- Providing an auditable, transparent view of ground-up claim costs from the gross and net perspective for: Local, corporate and captive (whether direct or reinsurance); External market insurers (fronting and co-insurers); and reinsurers, including retrocessionaires.
Understanding the benefits
When considering an investment in technology, it is important to prepare a robust business case and identify the resulting benefits. Key benefits that captive managers should expect from a technology solution include:
- Meeting regulatory requirements: From our experience, being able to meet expanding regulatory reporting requirements is one of the primary reasons captive managers invest in risk technology. It provides captive managers with reliable, auditable data that can be easily analysed and reported.
- Meeting the parent company’s reporting needs: This is another key benefit of improving a captive’s data management capabilities. A captive forms part of its parent’s balance sheet and corporate boards want accurate reporting on the captive’s potential impact on the enterprise’s finances.
- Improving risk management: The rise of corporate governance around risk management has led to more parent-initiated auditing. As a result, captives must respond to a mandate for more formal data management and enhanced reporting. Accurate tracking and reporting on the evolvement of identified risks is critical for both the management and reporting of risks.
- Timely notification of reinsurance claims: Managing programme complexity and reinsurance or retrocession arrangements is a key benefit of risk technology. Allocation of claim financials and premiums handling is another important benefit. Because reinsurers have strict claim submission deadlines, managing the notification and recovery of claims from commercial reinsurers is especially important.
Where to start?
Before approaching any technology investment, we recommend you conduct a review of your captive operations and establish the following criteria:
- Overall objectives and outcomes expected from the investment in technology.
- Current position of your overall programme, identifying any challenges or issues with the current systems, procedures and processes.
- Future desired position of your overall programme, identifying any new requirements or resolutions of existing challenges/issues.
- Prioritisation of all identified requirements and potentially phasing of the project.
Identifying the above criteria will provide clarity on what you expect to achieve with your investment, which will help you develop precise technology requirements. Throughout this process of establishing criteria, it is important to consider not just the technology (systems and analytics) elements, but your management (people and processes) as well.
With this perspective, you can develop a business case that shows your organisation’s decision makers that you understand where technology investment makes sense (over retaining manual procedures). Also, the incorporation of change management and associated process transformation will help ensure a successful outcome for the project.
Success with technology
While outcomes will vary based on situational factors, the following use cases demonstrate that captives can achieve considerable success through an investment in technology:
- Case 1: value of policy documentation Having a parent company with a long history and long-term liability issues going back several decades, the captive had established retro cover to fill in where no insurance was in place or was not covered to help protect the company. As part of an investment in risk technology, a complete historical policy archive was established. This allowed liability claims emerging from decades ago to be easily matched with the original insurers for recovery, thus saving the captive from covering these claims.
- Case 2: timely reinsurance claim notification With captives driving to more complex programmes and cover, there are often complex reinsurance programmes in place. This creates challenges in respect to complying with notification periods for potential losses and recovery of monies, especially when driven based on aggregates. To address this problem, the captive implemented an automated claim financial allocation solution. This new capability enables timely, easy monitoring of the aggregates and limits, including individual reinsurer recovery positions, to ensure compliance.
In summary, we have explored how captives can benefit from an investment in risk technology, replacing spreadsheets to improve processes and organisational outcomes. We invite you to learn more about how risk technology can help you at www.ventivtech.com/captives.
Angus Rhodes is product marketing & business development director at Ventiv Technology. He can be contacted at email@example.com
Angus Rhodes, Ventiv Technology, North America, Europe