Group captives are the future of risk management and insurance for complex risks

Of the many beneficial things group captives can do, one is the most valuable thing any organization in the risk management space can do.  It is currently something only group captives can do and it will only become more valuable in the future.  Unfortunately, few group captives currently do it.

‘It’ is to let group captive members know which are the most effective risk management practices, which are the best ways of implementing those practices, and which are the best ways of constantly improving those practices or adapting them to change, over time. 

‘It’ is achieved by enabling the feedback loop between risk management and insurance; capturing risk and risk management activity data from each group member and matching these to the members’ insurance performance.  

‘It’ is risk management incubation.

Most valuable…

It is the most valuable role any organization can perform in the risk management space because, with enough members (not as many as you would think), it enables a group captive to share with its member’s information that no individual member can currently develop on their own and the information is the foundation of an effective risk management system. The information includes how much risk each member has, how well they are managing it, how they can improve it if they want or need to, and it enables each member to credibly demonstrate to others they are managing risk well.  It means an organization can be confident in its risk management and be trusted for their risk management.  Nothing in risk management is more valuable.

Ever-more valuable…

It is a role that will become ever-more valuable for two related reasons.  

  1. Accelerating change means more uncertainty and volatility for members to deal with.  Enabling the feedback loop delivers the reliable risk management performance and change information members need to manage risk effectively amid change.  As change accelerates, this information will become more valuable.
  2. Even though there is more uncertainty and volatility for group captive members (and all insureds generally) to deal with, commercial insurer appetites for uncertainty and volatility is reducing.  Though the currently reduced appetite for risks like property in fire or flood prone zones or liability for sexual abuse and misconduct (SAM) may arguably be the result of the current hard market, there is some evidence the loss of appetite is more permanent.  For example, Lloyd’s of London was once famous for its willingness and ability to insure almost anything. Today, until a syndicate has obtained sign-off from Lloyd’s on a full business plan, it cannot insure even well-known risks that are not included in its plan. Getting a new business plan approved at Lloyd’s, never mind for a new risk, is neither a quick nor an easy process. Whether or not appetite is falling, the insureds that can credibly demonstrate they are addressing volatility, uncertainty, and accelerating change effectively will get the most from the commercial insurance market in the future.

Unique to group captives…

It is a role only group captives can currently perform because they are the only type of organization, as the risk management and insurance value chain is currently configured, with the necessary access and trust to perform the role. Access because they can capture members’ risk, risk management, and insurance data to create the diverse perspectives necessary for reliable analysis.  Trust because members can trust the group captive will only use the analysis in the members’ interests because the members own and control the captive.

Few captives perform the role because…

Implementing a risk management incubation strategy – the process of developing and calibrating a feedback loop to measure risk and risk management, to identify and understand change, and to enable members to rapidly test new practices to deal effectively with change – is not just something a group captive does.  It is something a group captive chooses to become because the role does far more than supplement their traditional risk retention and transfer optimization role.

Developing a well-calibrated feedback loop between risk management and insurance is not a small undertaking. It requires the development of systems and frameworks that eliminate silos across the risk management value chain. The frameworks must also ensure risk management systems are comprehensive, that they can be customized so the ability to make choices based on objectives and resources is maintained, and that data is captured consistently from every member and across silos.

Shifting a group captive’s role from intermediating between insurance buyers and sellers to intermediating between risk management and insurance helps everyone involved: 

  • Group captive members get to know how much risk they have, how well they are managing it, when they need to change, and how to change. 
  • Commercial (re)insurers get to dynamically know how much risk they are accepting, whether it is well managed (which most cannot currently establish), and to therefore materially refine their assumptions about volatility and corresponding premium and surplus requirements. Over time, this enables them to offer wider coverage at both lower cost and higher profitability than insurers without access to the same information.
  • A group captive gets to fundamentally transform its traditional intermediary role into a role that enables constant risk management improvement. This in turn enables a precedential role in developing coverage grants, underwriting guidelines, pricing expectations, and claims handling protocols – all in their members’ (owners) – interests.

Beyond insurance, however, when risk management incubation is aligned to members pursuing enterprise-wide risk management (ERM) strategies, risk management incubation goes well beyond helping members have fewer and smaller insurance claims and losses. It enables them to set more ambitious organizational objectives.  This is a value proposition that transforms what it currently means to be a group captive and, assuming this role is adopted more widely than at present, is why group captives can be the future of risk management and insurance for complex risks.

For more information on risk management incubation and to see the main elements of a risk management incubator, visit www.bokrim.com/the-bokrim-platform/.  Jeama has created BOKRIM, its first iteration of a risk management incubator, as a stand-alone incubator to deal with sexual abuse and misconduct (SAM) risk; stand-alone because:

  • of the rarity and complexity of SAM risk and risk management compared to most other risks;
  • the rapidly increasing value of SAM risk (it has increased by 10,000% in the last 10 years);
  • the commercial insurance market is withdrawing coverage for SAM en masse; and,
  • though stakeholder expectations that SAM be well-managed are high and rising, organizations cannot currently be confident they are managing SAM risk well or demonstrate this. 

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