A Captive Approach for
Supply Chain Risk
Captives can serve as a
mechanism. They can
also allow organizations to
access reinsurance to cover
By Jon McGoran
Arecent production shutdown of Ford’s flagship F-150 trucks, following a fire at one of Ford’s uppliers, is causing many companies to question how they manage and
insure against supply chain risk. For a growing
number of them, part of the answer is captives.
With the growth of just-in-time manufacturing and global sourcing, supply
chains are becoming more complex and vulnerable.
Meanwhile, dangers such as aging infrastructures, political instability, climate
change, cyber threats, communications vulnerabilities and even reputational harm,
threaten first-, second-, and even third-tier suppliers.
According to Nick Wildgoose, Zurich’s global supply chain product leader,
investment in supply chain risk management has increased considerably since the
global disruptions of 2011. Even so, he said, the level of disruption is still high,
with 65 percent of corporations [reporting] a disruption in 2017. Much of it is
non-damage related, “so cyber, loss of talent, etc. It shows you need to take that
holistic view of supply chain risk management.” Increasingly, that view includes
captives, which not only serve as primary-layer risk-transfer mechanisms, but can
also offer access reinsurance for difficult-to-insure losses.
“We’ve seen it on a fronted basis, we’ve also seen on a direct basis,” said
Michael Serricchio, managing director, Marsh Captive Solutions.
“It’s really no different than self-insurance, except you’re being more formal
about it, you’re setting funds aside … you’re building up capital, whereby you can
use that capital to hopefully avoid losses in the future. We have maybe five to 10
captives that are doing supply chain.”
FLEXIBILITY AND CUSTOMIZED SOLUTIONS
Captives are flexible, said Brian W. Merkley, global director, corporate risk
management, Huntsman Corporation, and well-suited for supply chain risk,
which can vary greatly by industry and product and may not be adequately
understood by the marketplace.
“Captives work even more efficiently when you have things that are outside the
box,” said Steven R. Bauman, head of global programs and captive practice, North
America, XL Catlin. “Certainly if there are gaps or deficiencies in that, that’s
where the captive does very well.
Captives can also be particularly useful to companies just beginning to address
supply chain risk, said Wildgoose. “Captives can sit outside corporate budgets, so
the captive can help provide budget for risk management,” he said. “It shouldn’t be
the source of all the funding, but it can start like seed capital.”
For some, an important benefit of captives is the access they can provide to
alternative capital: “Especially now, with the blending of the insurers and the
reinsurers and the capital markets, everybody wants … an opportunity to make
money in this business on the back, and you see all these different sources of
capital coming into the market,” said Gary Lynch, CEO and founder, The Risk
Project, LLC. “I’m not saying a captive is the solution, but a captive is a creative
way of doing it and it allows you to think outside the boundaries of traditional
coverages,” he said. “And potentially there are some tax benefits.”
For more mature captives, adding supply chain can be a natural next step.
“If the captive has been successful over the years, over the decades, and has the
wherewithal to take more risk, that’s the perfect scenario,” said Bauman.
A MULTIFACETED SOLUTION
Still, said Merkley, there’s limited appetite for a dedicated supply-chain captive.
“I’m hearing chatter about captives and their potential involvement in supply
chain risks, but I am not really seeing anybody pull the trigger on any actual
standalone supply chain risk policies,” he said.
The potential for overlap with contingent BI under a property policy is one
reason why, said Serrichio. “You don’t want to have double insurance in the
captive and in your property policy.”
Another is the potential for creating new gaps in coverage and how that aligns
with all of the other policies in your
program, said Merkley.
Bauman emphasized the need for
caution. “It’s got to be a very measured
and prudent use of a captive. So having
a good partner in all this is important —
folks that have seen it before and can assist
with the pricing of it is also important.” &
JON MCGORAN is a novelist and magazine
editor based outside of Philadelphia. He can be
reached at email@example.com.
• Supply chain risk may be best
housed in a mature captive.
• Captives allow organizations
to access alternative capital.
• Investment in supply chain
risk management overall
increased since 2011.
“If a captive has been successful
over the years, over the decades,
and has the wherewithal to take
more risk, that’s the perfect
— Steven R. Bauman, head of global programs and
captive practice, North America, XL Catlin
Captives can mitigate supply chain risks, but their use for this purpose is still limited.