Captive Insurers Tapping Surpluses to Decrease Cost of Risk
Captive insurers back policies with capital but, as with any insurer, these assets can accumulate as reserves and shareholder funds. At the end of 2016, for example, Marsh-managed captives had a total of more than US$110 billion in shareholder funds, providing owners with the means to reduce their total cost of risk in creative ways.
As organizations’ exposures increase in number, complexity, and severity, the shareholder funds generated by captives are playing an ever more important role. For many organizations, captives are at the core of their risk management strategy, and have moved beyond a traditional role of financing only property/casualty risks.
Specifically, we are seeing an increase in parent companies using captive shareholder funds to underwrite an influx of new and non-traditional risks, including cyber, supply chain, employee benefits, and terrorism, as well as to develop analytics associated with these risks and fund other risk management initiatives.
While surpluses are found in captives across all industries, the top five in 20161 were:
- Financial institutions: $40.1 billion.
- Retail/wholesale, food and beverage: $13.6 billion.
- Life sciences: $9.5 billion.
- Communications, media, and technology: $8.4 billion.
- Manufacturing $8.1 billion.
Just what kinds of projects are companies undertaking with funds drawn from captive surpluses? One US retailer was seeing deteriorating loss experience in its worker’ compensation program, while at the same time managing a large-scale acquisition. When a surplus of US$50,000 was recognized at year-end for its captive, the organization used the surplus to fund additional external safety and loss prevention consulting to supplement its internal resources. Building on the engagement’s effectiveness, the captive surplus has been used in subsequent years to fund additional risk consulting services.
Other risk management projects funded by captive shareholder funds in 2016 included initiatives to:
- Determine capital efficiency and optimal risk retention levels in the form of risk-finance optimization.
- Quantify cyber business-interruption exposures.
- Accelerate the closure of legacy claims.
- Improve workforce and fleet safety/loss control policies.
And there are other possibilities, depending on a company’s goals. As the use of captives continues to expand, we anticipate that other organizations will make use of captive-generated surpluses to fund such risk-related projects.
1Refers to Marsh-managed captives only.