The captive technology edge
Carrier technology: one of your greatest assets
Does your captive view its fronting carrier as an asset? The answer to that question in a marketplace challenged by price, exposure growth and investment yield is driven in part by the efficiency and productivity gains your key business partner helps you achieve and how they position you for the future. The relatively complex nature of captive structures demands a certain level of sophistication from insurance carriers that operate as the spinal cord of the captive enterprise. Captives can vary in their complexity depending on their ownership structure, number of shareholders, risk-sharing dynamics, premium size, lines of business and geography, so it is vital that the carrier has a technology platform that can effectively and reliably account for these variables in the normal course of business. Technology always plays a central role in captive insurance transactions, but its value comes to the fore in a soft market where captives need their carrier partners to help them protect receding margins and position them for the future. A platform that addresses the unique needs of captives creates a sustainable advantage in captive performance throughout the cycle.
Input and collection
Carrier systems in today’s demanding and dynamic business climate need to be part of an integrated and interoperable architecture that allows the carrier or a third party to bind and issue policies, capture policy level premium and loss data in real time, connect it, flow it and display it for effective performance management. Captives rely on financial systems that send correct invoices, track receivables, process incoming premium, and remit timely and accurate cessions to captives. Captives rely on thirdparty administrators (TP As) tasked with claim-handling to fluidly and completely communicate claim performance in language that carriers can easily grasp and incorporate. And captives rely on management systems that create information from where there was only once data.
A robust, edit-intensive carrier policy administration system with the ability to rate, quote and issue multi-line, multi-state policies for new business, renewals, cancellations, reinstatements, rewrites and endorsements, and export that data in a usable format to third parties, captures necessary data, avoids errors and eliminates multiple points of entry. The accuracy of the actual insurance policy issued is vital in capturing the exposures that the captive reinsures. If, for example, a named insured is mistakenly included on a policy and not accounted for in the pricing, then the captive will be assuming liability for which it is not receiving commensurate premium, which will thereby have a negative impact on the captive’s loss ratio. Additionally, when dealing with group captives, a policy issuance system that processes audits in an accurate and timely manner ensures that the appropriate premium is billed to the applicable captive member and hence the appropriate share of the captive’s liabilities is also assigned.
The efficiency and ease of use of the policy system is important in allowing captives to build up critical mass without concomitant cost through the peaks and valleys of the business cycle. Policy systems built on a modern computing platform are better able to turn out a large number of policies and provide a single point of data entry requiring less human capital. In the end, an accurate andefficient policy system allows a carrier to reduce costs and offer more competitively priced front fees for its captive clients.
Connect the data
Accurate and reliable information at policy-level detail is great, but it is not enough. Policy systems must be able to take that information and connect it to other sources to fully realise the efficiencies initiated at input. This places a premium on functionality (does it reside there in the first place?) and interoperability (can it link with other systems and data sources?). The ability to perform these connections not only creates further operational efficiencies, but sets the stage for the real value: multi-dimensional aggregation and creation of information from data. At a strategic level, the captive wants to monitor its own performance against plan by gross written premium, exposure by line of business, state, insured and class of business. At an operational level, there are third-party captive providers such as loss control, regulatory, accounting and claims providers that both send data to fronting carriers and rely on data from the carrier. Loss control vendors, for example, may best allocate their time and resources to a captive programme where preventable losses are identified by insured, territory, line of business or class code. Accounting firms require timely cession statements to prepare captive financial statements. State bureaus rely on data for experience modification factors, which impact captive premium. The ability of a carrier’s technology system to accurately and efficiently share data with third parties is not only central to overall captive performance, its absence is a drag on efficiency, productivity and opportunity.
Captives can uniquely capitalise on the power of dynamic and integrated technology through financial systems that seamlessly invoice the correct installment, net appropriate carrier expenses (including reinsurance, front fees, aggregate fees and taxes), andtimely and accurately facilitate captive cessions. The quicker the cession, the sooner the captive can begin to earn investment income on the loss fund. Using integrated financial and policy issuance systems, carriers can also readily determine schedule F and ‘Gap’ collateral requirements.This is essential in properly managing a captive as it continues to grow and pay out claims, as well as to give the captive and its owners the maximum amount of lead time to accurately forecast when additional capital or insured assessments may be required.
Group captives and captives with multiple cells assuming various quota share layers also require accurate accounting of losses applicable to different risk-taking layers. Most captives have aggregate attachments whereby the carrier provides a ‘stop-loss’ coverage to cap the captive’s liability. In addition, more complex group captives can have individual member deductibles that sit beneath the captive, placing greater importance on the carrier’s ability to precisely allocate loss and loss adjustment expense to each captive layer. A captive’s performance will, in the end, be determined by its profitability, which is linked to the carrier’s ability to correctly isolate financial detail from first dollar to policy limits.
The capstone to the process is the conversion of abundant and efficiently flowing data into information. It does little good to create productivity gains that are wasted on unproductive endeavours. If a system is robust, interoperable and specialised, then it is capable of producing unique business analytics that are diagnostic of performance at the lowest level of detail captured. Designing key performance indicators, early warning signals and benchmarks into a simple scorecard that is available through portal technology is a good way to create a common language of business information. It places carrier and captive on equal footing and reinforces the philosophical underpinnings of long-term commitment and stability of placement essential to the carrier-captive relationship.
Positioning for success
SPARTA and its business partners continue to derive competitive benefit from a shared and evolving technology experience. Capturing, connecting, flowing and ultimately delivering information to the captive from the carrier data set is the best way to position the carrier and captive for today’s opportunities. But it is the future that we think about when we consider the ability to leverage the power and efficiencies afforded by state-of-the-art technology. We believe that those who have positioned themselves in this way will be able to take full advantage of a rising market. This is an essential part of SPARTA’s captive technology vision.
Philip Cameron, CPCU, is vice president of marketing at SPARTA Insurance. He can be contacted at: email@example.com