Overcoming data challenges in a regulated environment

With the strong rate of growth in the number of captives (7 percent annual growth, according to the Marsh Risk Management Research 2014 Captive Benchmarking Report), parent organisations certainly recognise the value from having their own insurance carrier.

It is certainly a good time to be in the business of captive management. At the same time, however, there are challenges caused by parent corporations continuously reviewing performance and value, plus ever-increasing regulation.

What may not be fully recognised is that effective data management is key to efficient captive operations and also central to solving many of a typical captive’s challenges. Captives handling larger volumes of data, or with many data sources, cannot afford to ignore the demands arising from increased regulation and governance. Moreover, as business requirements change (for instance, adapting to a change in the risk management strategy of the parent) data management must evolve and keep pace with changing requirements.

In short, there is a heightened need for efficient operations in the captive, and effective handling of data is at the core of this need.

Key challenges and related opportunities

Captives have never had a more acute need for accurate, comprehensive data. That’s because they must be very flexible in their use of data: responding to reporting requests from parents, regulators and other stakeholders and satisfying growing operational demands. Businesses today demand efficiency and cost-effectiveness as a matter of course.

Captives must be well positioned to demonstrate their value to parents through, for example, managing cash flow effectively, aligning corporate and business-unit risk appetite, and flexibility to bring in additional programmes for coverage. It’s important to understand how data management is related to the key challenges captives face, with data being part of both the problem and solution.

Compliance with Solvency II or the equivalent legislation, as well as expanding corporate governance around risk management, is a significant challenge for many captive managers. Today’s captive manager needs control, auditability and transparency over all operational data such as premiums and claims.

Accurate figures are key, since reporting on gross and net positions and reinsurance arrangements will directly impact the capital the captive has to hold.

Until recently many captives have underestimated the challenges in satisfying the parent company’s own financial reporting requirements. Yet it’s hardly surprising that corporate boards are calling for accurate, comprehensive reporting on the captive’s potential impact on the enterprise’s finances; after all, a captive is part of its parent’s balance sheet. Here again, data management is crucial to providing auditable financial transactions that cover, for example, all premium and claims-related activities and movements.

Another challenge is giving actuaries the data they need to calculate capital requirements, claims reserves and premium allocations. Actuaries are being more forceful in their demands for a higher level of scope and detail, auditability and reliability in order to make these calculations. And when captives go to market, commercial carriers are demanding extensive data for competitive pricing.

Regulators are increasingly expecting captives to be run like commercial insurance carriers, including having proper risk management policies in place as well as fit and proper people in key positions such as risk management, finance and audit. Furthermore, proper documentation is expected.

Access to accurate, comprehensive data is a prerequisite to activities such as:

Managing counterparty exposure;

Meeting strict reinsurance policy and claim notification time limits;

Monitoring aggregates and claim positions; and

Managing premium cash flows between corporate, captive, commercial insurers, reinsurers and business units.

Using data properly will help to manage risk within the parent where visibility of the parent’s risk profile and appetite is paramount.

How captives can harness the power of data

Many captive managers handle their risk management needs with a variety of ad hoc (typically spreadsheet-based) and localised systems. As captives grow in complexity and responsibility, however, informal systems and processes often become inadequate. For many captives, developing and implementing a new technology solution is the answer to inadequate existing systems.

The solution for them is a risk management information system that automates a broad range of processes, from underwriting to claims management to finance and corporate and regulatory reporting.

These systems usually integrate with existing financial and other appropriate internal and external systems and should be able to:

Manage complex insurance programme structures;

Handle complex allocation of claims financials;

Manage legal compliance with Solvency II or its equivalent;

Provide auditable financial transactions to cover all premium and claims-related activities and movements;

Manage loss exposures;

Manage the flow of premiums and cash;

Provide an auditable and transparent view of ground-up claim costs from the gross and net perspective;

Allocate and calculate premiums for global programmes;

Track captive incoming and outgoing premiums and commissions;

Calculate and track proportional and non-proportional premiums per participant re/insurer; and

Calculate premiums written to premiums earned.

Where to next?

A clear driver to adopting technology is managing ever-expanding volumes of data—whether related to risks, policies or claims—and doing so with a set of disparate processes and systems.

When considering an investment in technology, it is important to prepare a robust business case and identify the benefits that will arise from the investment. It’s also important to know whether your captive can benefit from a technology solution. Not every captive needs a specialised technology, and for those that do, there’s no one-size-fits-all answer.

We invite you to learn more about data management and the technology solutions available (including determining whether and how they apply to your captive) by downloading our eBook, The Captive Insurance Company’s Guide to Overcoming Data Challenges in a Regulated Environment at www.ventivtech.com/captives.

Angus Rhodes is product marketing & business development director at Ventiv Technology. He can be contacted at: angus.rhodes@ventivtech.com

Ilka McHugh is director of Solutions Consulting EMEA at Ventiv Technology. She can be contacted at:  ilka.mchugh@ventivtech.com