Captives' value rising as tools for resilience
Global pandemic. Economic volatility. A new “normal” for organizations in every industry. 2020 has been a remarkable year for emerging risks, and one of the early lessons is the need to enhance resilience. Captive entities, which have long been a reliable tool for financing and mitigating risk, are proving their worth as equally valuable tools for making organizations more resilient.
As the rapid emergence of the coronavirus pandemic has shown, preparedness for interruptions from future risk events will be increasingly important. As severe as the impact of COVID-19 is, other risks continue to raise concerns, such as cyber risks and energy disruptions. The need for resilience in the face of emerging risks has perhaps never been greater.
Captives offer a number of significant benefits in making their owners more resilient, including:
Pre-loss funding. The ability to finance future losses through a captive offers considerable efficiencies, not least being a ready source of capital to pay for unexpected losses. Rather than using other funds on hand, or tapping credit facilities, captive owners can utilize assets held by their captive. While organizations have used captives for decades to finance stable, predictable risks, captives are potentially even more valuable in financing new and unpredictable ones.
Mitigating volatility. As risk-bearing entities, captives relieve pressure on their owners’ balance sheets by insuring exposures to financial volatility. In addition, captives under certain circumstances, with regulatory approval, may serve as a source of cash if their owners’ cash flow becomes constrained. For example, businesses across many industries experienced cash-flow problems when public authorities ordered lockdowns during the coronavirus pandemic. Surplus built up in a captive can be distributed back to the parent to provide cash-flow relief or be deployed for greater risk assumption.
Writing broader coverages. Captives provide flexibility in underwriting novel and traditional coverages on broader terms. In addition, captives also enable their owners to optimize access to commercially available coverages. When market conditions change, captives are able to scale up to assume more risk, evening out the cost of risk transfer. A combination of risk mitigation, risk assumption and risk transfer often is the most effective way to manage many unpredictable and emerging risks, including cyber.
Direct connection to a supporting network. Key assets and at times a necessity for captives is their connection to a broader environment of risk expertise and service providers; a captive owner does not need to worry about “going it alone” and finds tremendous value in partnership with a strong fronting carrier. Captives also have the ability to directly access reinsurance markets, a large and global source of capital. Captives can plug into insurance partners’ expertise in underwriting diverse risks, handling complex claims, and complying with regulatory requirements in different geographies. Fronting services, for example, can enable a captive to cost-efficiently expand its writings to increased geographies, customers, suppliers and even third parties.
Other elements of resilience are diversification and greater understanding of the risks that can disrupt an organization’s operations. When captives diversify the risks in their portfolio, they increase their capital and surplus, strengthening their ability to take on new and volatile risks. With captives’ long track record of success, many C-suite executives have a high level of confidence in their organizations’ use of captives as a financial tool.
AXA XL is committed to helping organizations succeed with captive strategies for the long term. Captive owners therefore can have trust and confidence in partnering with AXA XL. Other ways to benefit from AXA XL’s captive expertise include:
Tapping into AXA XL’s underwriting resources. AXA XL has global resources and many years of experience in underwriting insurance and reinsurance. Our depth of underwriting knowledge & expertise assists captive owners to make informed decisions about underwriting risks in their captives.
Utilizing sophisticated data and analytics. As a risk partner, AXA XL offers significant insights into a broad spectrum of risks and exposures using tools that support underwriting and claims.
Developing a deeper understanding of risk. One of the most effective ways to learn more about risk is to take some of it. A strategy of “step in and step up” in assuming risk, increasing the amount of risk over time, can be a safe way to monitor risk and collect data that informs decision making and enhances risk management.
Captives are already within the reach of nearly every size organization. In this era of emerging risk, using a captive and working with an expert partner are strong ways to achieve and maintain resilience.
Authored by AXA XL
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AXA XL, the new division of AXA Group, combines XL Group operations, AXA Corporate Solutions and AXA Art, to provide property, casualty and specialty risk insurance and risk management products and services for mid-sized companies through to multinationals, and reinsurance solutions to insurance companies globally. We partner with those who move the world forward.
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