Risk management: the key to exploring new captive horizons

Captive entities can pioneer novel arenas in insurance and risk management, provided they comprehensively grasp the nature of their coverage.

This insight emerged from an educational session at the Vermont Captive Insurance Association’s annual conference, titled 'Charting the Course for Captives: Exploring Fresh Frontiers'. It highlighted that captives frequently outpace conventional markets in conceiving pioneering risk transfer products, often collaborating with capital markets and other risk-taking entities.

Moderated by Ed Koral, Director of Strategic Risk Consulting at WTW, and featuring Joseph Ziolkowski, CEO and Founder of Relm Insurance, and Paul Carleton, EVP of Business Development at Old Republic Risk Management, the session emphasised the challenge of quantifying risk for novel contingencies. Such risks inherently lack historical data, necessitating information about probabilities and related factors.

While captives bridge insurance coverage gaps, the panel pointed to inconsistencies in the Internal Revenue Service's (IRS) criteria for identifying insurance risks. Commercial markets rely on past experience to anticipate future expenses, which falters when grappling with emerging or shifting risks. Even seemingly understood risks may hold unforeseen complexities.

Captives have creatively responded to market constraints, witnessed through an uptick in group captive formation and single-parent captives with altered structures and limits. New challenges also beckon, with captives venturing into areas like cryptocurrency-driven business interruption risks.

The panel stressed the importance of captives sticking to their core competencies while exploring novel risks. Captive owners' insights into specific risks offer a distinct edge over commercial markets. However, challenges arise if a captive's surplus lacks the resilience to absorb severe or volatile outcomes.