I had the pleasure of leading a panel last month at the 2023 VCIA Annual Conference entitled, “Tips for Communicating the Value of Your Captive,” and it was a lively discussion with great takeaways I wanted to share.
Today’s economy is tough, and the insurance markets have hardened. As a result, organizations are in reactive mode, looking for combative strategies to mitigate bottom-line issues. A captive insurance program has long been a risk management tool that allows organizations to weather proverbial storms like these. For those organizations with a captive, risk managers might have to defend against a piggyback mentality from leadership or other stakeholders, because the current environment creates temptation to treat a captive like an ATM regarding surplus. In addition, goals and purpose surrounding a captive are likely to change over the years. As such, it’s important to be able to illustrate captive performance in tangible ways that will resonate with audiences outside the core captive team.
Captives as Problem Solvers
There is a time and place to leverage capital surplus from a captive, but a great strategy is to use that by pouring additional coverage and innovation back into your insurance programs. To do so, we recommend securing reliable relationships with your broker and actuary to understand your captive’s risk appetite, what problems could be solved via a captive, industry statistics and trends, and whether the risk is worth the reward for a particular initiative. TPA or data analytics partners are also critical to assess exposures and determine potential loss prevention measures. Lastly, your captive manager should serve as a valued second opinion and will help evaluate the ramifications of exposing equity in the captive to new potential losses.
The ultimate goal here should be to reduce the total cost of risk (TCOR).
To bring concepts to life, one of Spring’s clients used captive surplus to hire a return-to-work coordinator, which in turn improved overall disability and productivity goals. Another client worked to obtain sexual abuse & molestation coverage that was difficult to procure. A private equity firm was able to retain ransomware coverage after a significant claim hit and utilized the captive to buy down the retention for individual entities, mitigating premium increases.
Metrics to Consider
Every captive has different experience, objectives, and risks represented, so it is hard to pinpoint benchmarks that will hold true across every program. That said, there are some factors and calculations that should be top-of-mind regarding captive performance.
While numbers and hard ROI are often the priority, “soft” indicators, such as those listed below, should not be discounted.
- Goals achieved vs. intended purpose
- Ability of the captive to cover risks the commercial market will not insure
- Risk distribution
- Captive expansion
For the numbers crowd like our actuaries, below is a non-exhaustive list of metrics to consider when working to gauge your captive’s success.
- Loss & expense ratio (i.e., combined ratio)
- Captive premium increase vs. commercial market increase
- Volatility of earnings by captive line of coverage, and in aggregate
- Leverage ratio (net written premium to surplus should be around 3:1 to 5:1 or lower)
- TCOR overall
- TCOR vs. market increase
Given the difficult markets we are facing as an industry, we are stressing to our risk manager clients the criticality of captive optimization, but also the need to truly have a pulse on your captive’s performance and be able to illustrate it to a wider range of stakeholders who may be under financial pressure. If you could use assistance in developing customized key performance indicators (KPIs) for your captive program, or in diving into these qualitative and quantitative measures at an organization level, Spring’s consultants and actuaries are ready to help.