CREATIVITY:  THE MOTHER OF INVENTION

Captives can be incubators for new approaches to coverages and risk management

By Michael J. Moody, MBA, ARM

Without a doubt, 2020 will go down in the record books as one of the world’s most challenging years. While the majority of risks faced in a normal year can vary from year to year, 2020 experienced just about all of the existing risks as well as several new, emerging ones.

When risk management professionals need to learn how to deal with these emerging risks, many participate in one of the numerous educational programs provided by state or other risk management and captive associations.

The alternative market, particularly captives, will play a key role as we look ahead 30 years.

One of the first states to enact captive legislation was Vermont; since doing so, it has been a leader in providing relevant educational programming. In August of this year, the 35th annual conference of the Vermont Captive Insurance Association (VCIA) offered a virtual program to address issues related to the COVID-19 pandemic, a world-wide event that has sickened tens of millions of people and pushed countries’ economies to the brink.

The VCIA virtual conference delivered 35 sessions directed at examining aspects of today’s risk reality. A session titled “Innovation and Emerging Risk Spotlight” explored the speakers’ projections about what insurance will look like 30 years hence. Specifically, the session addressed what form insurance transactions will take and who will be regulating the insurance market. As part of the presentation, speakers discussed additional emerging risks and how they will be treated.

The session was moderated by Laurie Solomon, president of ELT RiskSolutions, a consulting firm that evaluates insurance and risk manage-ment programs for mid-sized property/casualty insurers. Previously, Solomon spent 21 years as director of global risk management at the Coca-Cola Company. Among her responsibilities, she provided oversight for Coke’s three captives.

The first speaker was Peter Foley, who has more than 35 years of experience working in financial services organizations, with a focus on property and casualty insurance, specialty accident and health, reinsurance, and alternative risk management. Foley opened his part of the session by asking: “What indicators from the past will influence the next 30 years?”

In reviewing the effect of captives on the current market, he suggested that choosing August 1990 as the starting point allows practitioners to gain a helpful perspective on the growth of the alternative insurance market, specifically captives.

Foley noted that Vermont at that point had been an active captive domicile for about 10 years. In the early years, he said, captive formation was confined largely to Fortune 500 companies. Many believed that captives should be offshore solutions, relegated to places like Bermuda and other domiciles. He observed that Vermont decided to go against that thinking and began to promote itself as a viable solution. As evidence of its success, the state now is home to 1,159 licensed and 585 active captives.

Over the years, captives in general and risk retention groups in particular grew in popularity as solutions for entities that embraced them as a means to control their own risks and protect themselves from premium increases. In large part because of the soft market and the massive amounts of capital that have flooded into the insurance market, interest has waned in these alternative market approaches.

Shortly after the start of this year “reality came crashing down on us,” Foley said. He noted that the entire world had a new, unseen enemy: COVID-19. He observed that the pandemic has had significant effects on the insurance industry.

A key concern is how remote working affects coverages like workers compensation. He believes that captives will play a key role in resolving this and other issues and points out that “they can serve as incubators or laboratories” and create an environment “that is receptive to new ideas.”

The final speaker was Edward Koral, managing director of BDO’s Insurance Risk Advisory practice. His 35 years of experience in the alternative risk arena have given him an informed perspective on industry trends. Koral pointed out that “the insurance marketplace has been organized by how we have discovered risk over the years.” As new risks are discovered, he explained, “they first try to find appropriate coverage under existing policies.” Failing that, they must look to the development of new coverages like employment practices liability and cyber liability.

What insurance buyers have wanted, he noted, is to call their broker and be assured that a specific loss is covered. That day may never come because, as Koral pointed out, “Risks typically expand and become more complex” as they mature.

The alternative market, particularly captives, will play a key role as we look ahead 30 years. Both session presenters believe that captives can provide a viable incubation platform for the development of new coverages and approaches to risk management.

Koral noted that one market feature that will have a long-term effect is “creativity and innovation that will flow from competition.” Captives will be able to provide an environment where risks can be researched and changes made quickly. As always, “creativity is the mother of invention.”

The author

Michael J. Moody, MBA, ARM, is the retired managing director of Strategic Risk Financing, Inc. (SuRF), a firm that was established to provide consulting services to captive and other alternative risk transfer mechanisms. As a contributor, he continues to promote the benefits of the ART market by providing current, objective information about the market, the structures being used, and the players involved.