Dr Paul Wöhrmann, Zurich Global Corporate


Optimising your risk portfolio can make captives more attractive under Solvency II, argues Dr Paul Wöhrmann of Zurich Global Corporate.


with the stringent new requirements that will be imposed by Solvency II when it is implemented in 2013 and 2014.


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Over many years, the role and use of captives have been growing steadily—Zurich estimates that around half of the world’s largest companies run captives. Its global corporate unit alone fronts more than €1 billion in written premiums allocated to more than 200 captives.


Zurich’s experience is that companies which run captives take a sophisticated approach to risk management and exhibit strategic buying behaviour for insurance or reinsurance.


Change is imminent


Traditionally, captives write less diversified portfolios than mainstream insurers. They also lack the same levels of governance, infrastructure and expertise. However, that is set to change with the imminent impact of Solvency II, which will place additional pressure and costs on parent companies to run their captives more efficiently and structure insurance programmes so they comply with the new requirements.


Solvency II requires companies with captives in Europe to show they


have robust, transparent risk portfolio management practices and maintain appropriate capital levels to support possible losses across the risk portfolio. The new rules will reward captives by imposing lower capital demands, if captives diversify their risk portfolio and so reduce total portfolio volatility. This is why Zurich believes the strategic role of captives will be extended as multinational companies realise the potential benefits of running a captive in a Solvency II environment.


aptives are a unique vehicle by which their parent companies and affiliates can manage their global risk portfolio, finance retained risk and transfer remaining risk to reinsurance carriers. However, many captive owners will need to cope


Assess the potential of captives


A captive owner needs to assess and understand the quality of the captive portfolio as well as its performance and decide how best to reduce volatility by introducing risks with lower volatility, such as life insurance elements or trade credit insurance.


For managers of captives, Solvency II is an opportunity to collaborate


with and support parent company chief financial officers, whose eyes are firmly on balance sheet capital requirements, and encourage them to view captives in a new light. While most companies are familiar with the details of Solvency II, many appear less certain on what is the best strategy for using their captives to optimise risk management.


It is relatively straightforward to assess how changes can be made


to improve risk quality, for example, by effective loss prevention to reduce the frequency and severity of claims or by bringing together different, uncorrelated lines of business, particularly life and non-life insurance elements.


Focus on reducing volatility


Why aren’t many more multinational companies doing this? Too often, combining volatile and non-volatile insurance in a captive portfolio is not pursued because it requires understanding, collaboration and strategic alignment between the corporate functions that govern corporate life insurance and the ones that manage non-life insurance. But if, for example, the human resources department were to team up with risk management to develop a joint captive approach, a company could unlock lucrative benefits in the form of capital requirements and premium savings, even under Solvency II.


On the other hand, such solutions also require an experienced insurance carrier, in which cross-functional expertise in underwriting


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