Captives' Value Rising as Tools for Resilience

Steven R. Bauman, Head of Global Programs and Captive Practice in North America, AXA XL

Steven R. Bauman, Head of Global Programs and Captive Practice in North America, AXA XL

Global pandemic. Economic volatility. A new “normal” for organizations in every industry. That said, 2020 has been a remarkable year for emerging risks, providing an early lesson regarding the incessant 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 for making organizations more resilient.

The rapid emergence of the COVID 19 pandemic has shown the importance to prepare for interruptions from future risk events. Despite the severity of COVID-19, other risks continue to raise concerns, for instance, cyber risks and energy disruptions. The need for resilience in the face of emerging risks has perhaps never been greater.

Captives offer several significant benefits in making their owners more resilient, including:

• Pre-loss funding - The ability to finance future losses through a captive offers considerable efficiencies, being a ready source of capital to pay for unexpected losses. Rather than using other funds in 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, these are potentially 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 higher risk assumptions.

• 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 can 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 cybercrime.

• 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 “doing it alone” and finds tremendous value in partnership with a strong fronting carrier. Captives also can directly access reinsurance markets, a large and global source of capital. They can plug into insurance partners’ expertise in underwriting various risks, handling complicated claims, and complying with regulatory requirements in different geographies. For example, fronting services can enable a captive to expand its writings to increased geographies, customers, suppliers and even third parties cost-efficiently.

Other elements of resilience are diversification and a greater understanding of 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 in making informed decisions about underwriting risks in their captives.

• Utilizing sophisticated data and analytics - As a risk partner, AXA XL offers significant insights throughout a broad spectrum of risks and exposures using tools that support underwriting and claims.

• Developing a deeper understanding of risks - One of the most effective ways to learn more about risks is to engage in one. 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 reach of every organization irrespective of their size. In this era of emerging risk, using a captive and working with an expert partner is crucial to achieve and maintain resilience.

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