EMEA Captive
And the threats posed by concentration of risk?
I think that’s a big area. On the whole, I see the captive benefit actually being in the consolidation of risk. Captives have a real role to play in dealing with concentrations of risk because they can, probably, best negotiate and interpret risk information and use it sensibly in the market. Despite being penalised under Solvency II, firms that are only writing primary lines of insurance know exactly what they are doing because they have the history.
How should captives and their parents be approaching enterprise risk management (ERM)?
I have always believed that the chief risk officer is the chief executive
of any corporation: at the end of the day company-wide ERM is his responsibility. ERM should, ideally, be led by someone on the board, although in my opinion what has worked quite well is a risk committee, which involves the insurance people, the audit people, the treasury and security people and even the IT people these days, as this can potentially be a big risk. Together they can get a good handle on the demands of ERM.
collected, or it is being diversified into many different areas, and the parent needs a focal point and you don’t necessarily want to give it to an outside entity. The main benefit of employing a captive is in areas where the parent either has frequency of loss or medium sized losses that don’t make financial sense to transfer into the commercial market.
What about the threats posed by uniqueness of exposures?
Unique exposures present a considerable challenge, but writing them within a captive is also quite a good idea. There is a risk there, but by being owned by their parent company and insuring their risks there is some justification for taking on unique risks. However, the captive owners need to be sure that they have quantified to themselves what their exposures are. I think it can be a good idea to write the risk, set the pattern and then establish the history, but just to make sure you don’t kill yourself in the process.
Captives, for their part, are a very positive aspect of risk management because they provide a lot of centralised information, particularly for multinationals that may not get such risk insights from another source.
For those corporations with considerable international spread, the reality is that overseas subsidiaries and joint ventures can be influenced by local market practices. By involving captives in the primary layers, valuable risk management information can be obtained relating to trends and specific problem areas. In the event of a serious loss, the involvement of the captive ensures there is some parental influence in negotiating both the response and the settlement.
There is also the opportunity to encourage risk improvement through incentives and/or penalties applied to the cost of local maturities. If some territories are being more risk aware than others you can influence the pricing. Finally, the review of captive business at a senior level within the company can provide a perspective to the senior management team about local subsidiary issues that they might not otherwise be aware of.
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