Defying Disruption in the Captive Industry David Beyer, Director, - - PowerPoint PPT Presentation

Defying Disruption in the Captive Industry

David Beyer, Director, Risk Management, Alaska Air Group Loren Nickel, Director, Business Risk and Insurance, Google 2017 RIMS Risk Manager of the Year Ward Ching, Managing Director, Aon

Learning Objectives

At the end of this session, you will:

• Be exposed to new research addressing current and future trends

impacting the development and use

• f

captive insurance companies.

• Receive a selected briefing regarding new economic and risk

management research focused on understanding disruption as a business strategy.

• Gain an understanding from captive owners/practioners as to how

disruption is embraced or mitigated using captives

Di Disc scuss ssion Ag Agenda

Captive Trends – Setting the Stage The Concept of Disruption How Captives are Embracing Disruption: A Working Hypothesis

Disc iscussion Ag Agenda

Captive Trends – Setting the Stage The Concept of Disruption How Captives are Embracing Disruption: A Working Hypothesis

Ca Captives – th the numbers

Close to 7,000 captives world wide, and growing year on year

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ca Captives – th the numbers

Most captives are formed by companies in North America where risk management programs are the most developed. The number of captives continued to grow in the U.S. in 2015 up 8.2% over 2014.

2010 2011 2012 2013 2014 2015 % increase (decrease) APAC 138 134 147 149 155 158 1.9% Canada 29 31 31 32 21 20 (4.8%) Europe 957 1,015 1,007 918 921 883 (4.1%) North American offshore 2,632 2,609 2,715 2,828 2,881 2,781 (3.5%) United States 1,831 2,042 2,225 2,493 2,861 3,097 8.2% Total 5,587 5,831 6,125 6,420 6,839 6,939 1.5%

Co Coverages in in Ca Captives

Top 10 risks written by captives

Property Damage & Business Interruption General/ Third Party Liability Employers Liability/ Workers Compensation Product Liability and Completed Operations Professional Indemnity/ Errors and Omissions Liability Auto liability Marine Crime/ Fidelity Catastrophe D&O Liability

Why y are companies conti tinuing to forming a captive?

Even though the insurance market continues to be challenged with soft premium rates and low interest rates, an appetite for captive utilization still exists and in many ways is increasing year on year.

Strategic risk management tool –

33%

Cost efficiencies/ reduction of insurance premiums –

27%

Control on insurance programs –

10%

Ability to establish reserves –

4%

Tax optimization –

4%

Other –

4%

Cash flow optimization –

4%

Risk finance expense

• ptimization –

8%

Access to reinsurance market –

9%

Ca Captives continue to demonstrate benefits

1

Capacity

2

Risk Management & control

• Provides insurance coverage in

fluctuating insurance cycles = price stabilization

• Reduces the dependency on

commercial

• markets
• Direct access to reinsurance markets
• Cures market dislocation due to

“best terms” requirement on quota- share placements

• Influence program design and cost
• Central access to loss data and

reserving practice

• Claims handling control image

preservation, avoidance of legal precedents, out-of-court settlement, negative publicity management, damage limitation

Be Benefits ts, cont.

3

Structured retained risk strategy

4

Direct financial benefit

• Greater structure and control over risk

management and financing

• Continuity and breadth of insurance

coverage

• Reduced volatility on insurance spend
• Optimize cost benefit in retention v.

transfer

• Ring-fence risk funding
• Wedge in market negotiations
• Captures insurer profits
• State tax Benefit (permanent)
• Acceleration of tax deductions
• Global Cash Management
• Only form of self-insurance where financial

leverage is possible

Which ind industries are usin ing capti tives?

Th The main ty types of f ris risk k underw rwritten by y a captive

59% 45% 28% 27% 26% 25% 18% 15% 15% 15% 8% 56% 47% 31% 26% 30% 32% 23% 19% 22% 17% 23%

Coverage Underwritten in next 5 years

Di Disc scuss ssion Ag Agenda

Captive Trends – Setting the Stage The Concept of Disruption How Captives are Embracing Disruption: A Working Hypothesis

Disruption as a concept…

What else does Disruption look like?

Denise Garth: Identifying Disruption and rate of change

VOLATILE—The nature, speed, volume, magnitude, and dynamics of change UNCERTAIN— The lack of predictability of issues and events COMPLEX—The confounding of issues and the chaos the surround any

• rganization

AMBIGUOUS— The haziness of reality and the mixed meanings

• f conditions

Di Disc scuss ssion Ag Agenda

Captive Trends – Setting the Stage The Concept of Disruption How Captives are Embracing Disruption: A Working Hypothesis

ASA Assurance

• Original Plan – 2016 - 2018
• Workers Comp Ongoing (Alaska Airlines / Horizon Air)
• Travel Accident
• Workers Comp Loss Portfolio Transfer (Alaska / Horizon)
• Actual Operations – 2016
• Workers Comp Ongoing (Alaska / Horizon)
• Workers Comp for new company McGee Air Services
• Physical Damage Liability for McGee Air Services

ASA Assurance

• Actual Operations – 2017
• Replacement of commercial policy for new acquisition Virgin America
• Actual Plan – 2017
• Replacement of commercial product policy for Horizon
• Workers Comp Loss Portfolio Transfer (Alaska /Horizon)
• Workers Comp Loss Portfolio Transfer (Virgin America)
• Workers Comp Ongoing (Virgin America)
• Actual Plan – 2018
• Travel Accident

Imi grows up

25

2010 – E&O Current 23 covers $ in millions

Deciding what to keep, what to transfer

Severity Frequenc y Retain Share Transfer

26

27

Risk Challenges

• Risks not contemplated by insurance companies
• Beta/test periods before smaller live launches
• Quick to market solutions which doesn’t match slow regulatory

environment

• Some products are seen as beneficial to insurance companies and
• thers are not, so not all insurance companies are supportive of

product potential

• Wide variety of risks, many new and emerging are difficult to handle

for any one insurance company

28

Moonshot Culture

29

30

Captive Solutions

• Allow for greater freedom of terms, better pricing and availability
• Allow for beta testing and smaller launches, do not need immediate scale
• Very quick to market solutions, faster than any insurance company
• Partner with insurance companies on fronting, where needed or desired
• Wide variety of risks are beneficial for the captive, as it allows for a

portfolio effect and is a better use of capital

• On-staff actuarial resources ensure risk taking is not excessive and is in line

with capital requirements

Mahalo!