New Ways to Use Surplus
There is a move
strategic use of
surplus to fund risk
consulting and more.
By Alex Wright
Surplus from captives is enabling companies to reinvest in their strategic priorities.
Surplus produced by captives traditionally found a use in taking on additional limits, writing new lines of business or funding loss control. But as more captive owners start to write emerging risks uch as cyber, supply chain and terrorism, there is a move toward using surplus to fund a variety of risk management-based projects
and analytics associated with these risks.
With most mature captives accruing surplus from multiple years of positive
underwriting performance — most notably financial institutions, which stood at
$40 billion in 2016, according to Marsh — that trend is only going to accelerate.
In the last year alone, surplus use extended to initiatives to determine capital
efficiency and optimal risk retention levels in the form of risk finance optimization,
quantify cyber business interruption exposures, accelerate the closure of legacy
claims and improve workforce and fleet safety/loss control policies.
One major U.S. retailer, whose workers’ compensation program reported
deteriorating loss experience at the same time the company was grappling with
a large-scale acquisition, used its captive’s $50,000 surplus to fund additional
external safety and loss prevention consulting in order to boost its internal
resources. Building on that, the surplus was used in subsequent years to fund
additional risk consulting services.
“Surplus has become part of a much larger debate around data, customer
information and how that can be used to maximum effect,” said Ward Ching,
managing director, Aon Captive & Insurance Management. “Clients are now
asking strategy-related questions about business growth, product-service mix and
market penetration and captives are at the heart of that because they hold much of
that data and the analytical capability to achieve a lot of those things.”
CENTRAL TO RISK MANAGEMENT STRATEGY
Ellen Charnley, president, Marsh Captive Solutions, said companies
increasingly put their captive at the heart of risk management and risk finance
strategy, going beyond the financing of traditional property and casualty risks.
“This means that the captive isn’t simply doing what it maybe historically did 10
years ago, just funding for the retentions and deductibles,” she said. “Now it’s looking
to potentially take on greater risk and to reduce the amount of commercial
insurance risk transfer transaction, for example, in buying commercial insurance.
“Also, companies are looking potentially to structure deals whereby there’s much
greater retention in the captive and buy higher level coverage to protect the captive
through the reinsurance market. That structure is one a lot of companies, particularly
the larger ones, are looking for as they get more comfortable in retaining risk, and
in that respect, the role of the captive and the risk manager has been elevated.”
In terms of surplus use, Charnley said that captives are increasingly being used
to fund analytical work focused on retentions.
“There’s more sophistication with respect to analytics and the captive’s role to
play in that,” she said.
“The cost of that analytical project work is now being borne by captives using
their potential profits and surplus they
have developed over the years.”
Another example, said Charnley, was
using a captive to fund an actuary who
can understand, predict and quantify
a company’s known risks. The surplus
can also be used to fund analysis of the
company’s existing book of claims in
order to speed up claims closure and
where necessary, to challenge claims
adjustors, ultimately lowering the cost
of risk in the long run, she said.
“Predictable risk is always an area
for companies to try and improve
“There’s more sophistication
with respect to analytics and
the captive’s role to play in
— Ellen Charnley, president,
Marsh Captive Solutions
• Captives are becoming vital to
risk management and risk finance
• Risk management-based projects
are funded by some companies
with captive surpluses.
• Surplus is being deployed to
write non-traditional emerging