CICA Building the Best: How COVID-19 has developed companies’ use of captives

The COVID-19 pandemic has been educational in terms of demonstrating the full risk management capabilities of captives, according to Heather McClure, chief risk officer at OU Health. Speaking in a Q&A session as part of CICA’s Building the Best digital education series, she outlined how her organisation’s captive enabled it to adapt to the new scenario.

“The pandemic has taught us a lot,” she said. “It was like a boot camp on what the captive can do.”

One of its capabilities related to reassessing premiums. “We looked at the fact that we weren't providing elective surgeries for some time, for example, and where that affected our risk profile,” she said. “It actually lowered our risk profile in some spaces, and so we were able to adjust for that and give some much-needed rebates to policyholders during that time.”

Looking ahead, OU Health is exploring opportunities to restructure its risk management drawing on the lessons learned during the pandemic.

“We’re looking at how we can use those to springboard to new programmes, new operations for our captive, bringing in additional lines,” she said. “Obviously the hardening market is of great concern to everyone and so, working with our captive management and our brokers and other experts, we are looking at what lines, what deductibles, we can bring into our captive.”

Discussing the topic of emerging lines, Michael Zuckerman of Temple University Fox School of Business highlighted significant trends in terms of business interruption, especially related to the pandemic and cyber.

“I think what's really interesting in terms of emerging trends, is that when I'm talking with organisations that are thinking about a captive, I always tell them to think about all their clients’ issues, whether it's contracts, insurance regulation, bond covenants - because some of those we can negotiate away; you don't necessarily need a commercial front, but you also have to think about what can we get done in the reinsurance marketplace, because there's no sense in thinking about emerging exposures if there isn’t capacity to help you be able to build the programme over time.”

He added that organisations need to consider how they model their cash flows associated with alternative programmes including these emerging risks, with maybe less data involved.

“You have to tie those models back to how it would impact earnings per share, because that could go to credit rating, that could go to access to capital. So yes, the captive is, I think, the best risk management tool going, and I think it's associated with all aspects of risk management, but they need to be really thoughtful.”

He also highlighted the need for an organisation to consider what it wants to control – for example, ESG. This can be a useful risk identification tool. “That can help identify emerging exposures for organisations - for example, environmental exposure will become a more acute issue for organisations under this new administration; they’re making it very clear they're going to ramp up regulations, which creates a compliance issue,” he said.

He added that when considering bringing emerging risks into a captive, organisations need to establish whether they can control the frequency and severity of those risks. “You need to answer that question first, especially for things like cyber, this increasing environmental compliance issue and supply chain,” he said.