MUNICH RE
“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 fulfilled.”
financial performance should therefore begin with an analysis of the economic assessment process itself. A captive is an insurance entity, so it will always be difficult to measure and compare its performance with non-insurance projects and ventures competing for internal resources. Companies should ensure that financial assessments recognise all the benefits a captive creates, such as the potential difference between market premium rates and captive rates. At the same time, firms need to ensure that an adequate hurdle rate is used for measuring value creation. In many cases, the standard WACC of the parent company is not the most appropriate hurdle rate.
Another option is to increase operational excellence by running the captive as if it were an insurance company under competitive market conditions. This would mean implementing risk-based steering methods as well as asset-liability-management (ALM). Experience shows that implementing ALM, an area that captives
have not traditionally focused on in the past, can improve financial performance and value creation considerably.
Increasing the value for the internal clients The internal client’s perspective can be a very interesting one, as it has the potential to build up widespread support for the captive throughout the company. The first step regarding increasing value for internal clients should therefore be the capture of detailed knowledge of the needs of all existing and potential internal clients. A captive can increase value by providing specific insurance solutions to SBUs that might not be available elsewhere in the market.
The range and satisfaction of internal clients can also be increased by analysing current insurance market conditions and potential shortcomings which might head off future dissatisfaction among SBUs.
68 CICA | Forty years of captive leadership
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