MUNICH RE
Dirk Schafer of Munich Re outlines how captives can apply three separate, but complementary, perspectives so that they can better understand and build captive value.
qualitative aspects that need to be considered. At the same time, there are various stakeholders involved, all of whom can have confl icting interests. However, by distinguishing three distinct perspectives and the respective stakeholders, a reasonable approximation of best practice seems possible. The three perspectives are:
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• The chief fi nancial offi cer (CFO): This means assessing the fi nancial performance of a captive, measured against return on invested capital (RoiC) and return on equity, among other indices, together with hurdle rates such as weighted average cost of capital (WACC). From the CFO perspective, a captive creates value when the RoiC exceeds the WACC.
• The internal client: Examples of internal clients may be managers of strategic business units (SBUs) or a human resources (HR) director, if the captive insures employee benefi ts. The value internal clients attach to the captive can be quite heterogeneous. The managers of SBUs might value a captive if they can achieve competitive premium rates and are able to demonstrate improvements in risk management. The HR director, on the other hand, will probably value the ability to offer a reliable and attractive employee benefi ts package. In both instances, understanding and meeting internal client needs can signifi cantly increase the perceived value of a captive and highlight its holistic nature.
• The chief operating offi cer (COO): A COO attributes value to a captive if it creates transparency regarding insurance risks at the corporate level and enables him to quantify those risks accordingly. Value is also derived from the possibility to create the right incentives for risk management within SBUs to reduce and prevent losses.
It follows that initiatives which increase captive value can be both complementary and confl icting. An example of confl icting targets would be high RoiC versus low premiums for SBUs. Complementary targets would include efforts to achieve a higher RoiC, and initiatives for improved risk management which ultimately result in lower claims.
Due to the fact that a captive has to compete for scarce resources in a value-optimising corporate environment, it makes sense to consider the CFO’s perspective as a necessary condition which has to be fulfi lled. Given this fi nancial constraint the perceived value of the other stakeholders should be maximised.
Increasing fi nancial performance As we have now established, a captive must create fi nancial value in order to be sustainable in the long term. The process of optimising
CICA | Forty years of captive leadership 67
n order to discuss options for increasing the value of a captive, it makes sense fi rst to spend a few moments on the value a captive delivers for its parent. Assessing the value of a captive has always been complex, not least because of the quantitative and
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