Magazine article Risk Management

Captive Creativity: Once Used Primarily for Traditional Coverages, Captives Are Beginning to Play a More Strategic Role for Innovative Companies

Magazine article Risk Management

Captive Creativity: Once Used Primarily for Traditional Coverages, Captives Are Beginning to Play a More Strategic Role for Innovative Companies

Article excerpt

With close to 7,000 captive insurers globally, compared to 1,000 in 1980, and about 70 captive domiciles, 35 in the United States alone, it might seem that the captive market has reached a saturation point and new formations would dwindle. Indeed, the National Association of Insurance Commissioners (NAIC) said in March that the vast majority of Fortune 500 companies now have captive subsidiaries.

But according to Art Koritzinsky, a managing director with Marsh, the interest is still there. "If you look at established jurisdictions, there are still more captives being formed, even though many parts of those markets are very mature," he said.

Driving that growth are savvy boards and executives who have become familiar with the basics of captives and are now asking how their captive can help them achieve strategic goals. Rather than simply serving as an insurance provider, the captive becomes a finance vehicle that can be used for anything from cementing relationships with customers, to providing reinsurance, to insuring difficult risks where coverages may not even be available.

Dan Towle, director of financial services in the captive insurance division of the Vermont Department of Financial Regulation, agreed, noting that the state has seen a significant evolution in organizations' knowledge. "Over the years the types of inquiries have changed," he said. "It used to be 'what's a captive?' Now people often have done their feasibility study and are ready to review domiciles."

Types of captive structures have expanded as well, adding to the possibilities. While most of those formed are still single parent, or "pure," captives, other types now include rent-a-captives, risk retention groups, as well as group/association, agency, branch and protected call captives. "Variations continue to flourish as companies come up with more sophisticated and innovative ways to use captives," the NAIC reported.

THE AMORPHOUS CAPTIVE

As organizations have become more comfortable with the concept of captives, progressive organizations are relying on them not only for traditional uses such as paying deductibles and writing difficult risks, but also to grow their relationships with customers.

Ward Ching, managing director of captive and insurance management at Aon Risk Solutions, noted a growing sophistication among organizations that are shaping their captives to advance company strategies.

In the past, a lot of companies did not think this way about captives, Ching said, "and they didn't need to, because they were doing fine with the business model they had." But that has changed. "Today, senior leadership is asking, 'If I could create an insurance company of some variety, how would I use it and how could I create a better customer experience?' Rather than a focus on managing retentions, there is a realization that money can be made by securing customer relationships," he said.

Companies such as AirBnB and Uber are among those that have identified captives as a possible way to help transform their business model. "Many 'disruptive' organizations now see captives as a way to grow their relationship with customers," Ching said. "If you think about companies like Google, Amazon, Square or Hewlett Packard--any organization with a significant database for which there are additional channels to create a stickier buyer experience--captives are being inserted into that push of the business to create pathways for products and services."

Retailers are also looking at captives to enhance their relationship with customers by creating a channel for introducing new products and services. For example, the captive may give companies a way to offer services such as warranties and extended warranties, as the automobile industry has long done. "If you buy a new car, there is a manufacturer's warranty and an extended warranty. Or there is a warranty on paint and a warranty on your interior. …

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