Losses: the number one killer of captives

Captives are often focused on managing their fixed costs, but losses often constitute an even greater proportion of their expenses, according to Eric Lark, partner at Kerr Russell, the Detroit-based law firm.

Speaking at the Cayman Captive Forum in a session titled Loss Control and Claims Handling: Options, Obstacles and Opportunities, Lark said: “Losses are the number one killer of captives, especially group captives.”

Loss control should be built into captives' business plans, said Craig Ream, executive vice president at Willis Towers Watson. Failing to do so is “a recipe for disaster from a risk financing standpoint,” he said. “If captives are comfortable with their risk control it makes big claims easier to manage,” he added.

Ream admitted creating a culture of risk control is difficult, but said group captive members can learn from each other if they are given opportunities to share experiences. Groups can set minimum standards as an entry requirement for new members, while annual risk assessments help members identify areas they can improve, he said.

Risk control workshops, attended by safety directors, can help members share ideas for improving safety and reducing losses, and increase pressure on members to adopt best practices. Groups can even create awards for high achievers to encourage members to compete on safety, said Ream.

Lark advised captives to set aside premiums specifically for loss control initiatives. The amount they should set aside will vary depending on the nature of the captive, he said, with some of his clients allocating around 1 percent of premiums, and others around 3 percent.

Lark noted heterogeneous group captives find it harder to control losses because different industries have different factors driving their loss experiences, although experiences in workers' compensation lines tend to be more comparable between industries than in other lines, he added.

Arch assigns risk control support teams to its captive clients to assist with losses and help them think about how they could be prevented in future, said Lisa Marecki, associate vice president of claims at Arch Insurance.