The past two decades have been characterized by uncertainty and volatility — conflict, terrorism, Brexit, a global financial crisis, pandemic and inflation. As the captives’ industry reflects on 20 years’ responding to this unpredictability, it’s a good moment to think about how to optimize captive risk resiliency and prepare for the next 20. What risk management megatrends will define the industry and how can captive risk managers and CFOs position themselves for resilience and value into this future?
We examine four megatrends and suggest actionable steps for those using a captive as part of their enterprise risk management system to stay one step ahead. Advanced analytics will enable you to effectively identify, manage and optimize the most impactful risk drivers, including climate change long into the future.
In recent years, the captives’ industry has already started to witness a significant shift from year-to-year risk management perspectives to longer-term outlooks. Looking ahead, captive managers will be under more pressure to embrace managing risk over decades-long time horizons.
Leading on this will be about accessing integrated underwriting solutions and digital platforms that allow you to consolidate data to gain a single ‘source of truth’. This clarity enables you to better quantify risk and define what risk financing efficiency really looks like — not from one year to the next, but over an enduring future.
By using digitalized captive platforms, you can also more easily integrate with risk analytics quantification tools. This is true whether these tools quantify property or liability exposures, the impact of physical climate risk or broader risk optimization.
This leads us to the next two key megatrend themes: outsmarting climate uncertainty and harnessing broader data-driven risk optimization.
Moving from a tactical to a more strategic risk management stance for your captive program allows you to more effectively manage the risks associated with climate change.
Companies face a twin challenge: reducing your businesses’ impact on the causes of climate change while simultaneously managing the effects of climate change on your physical sites and productive assets. Some climate-related risks associated with adapting your business model lower the environmental impact or build greater resilience in your buildings and productive assets may not be adequately covered by traditional insurance markets. Addressing such risks and insurance gaps as part of your captive program provides a mechanism for both better packaging that risk for potential future transfer to traditional insurance markets and building reserves in the meantime.
Developing comprehensive climate risk management strategies that enhance resilience has to be a priority for captive managers and their C suite clients. Designing these strategies successfully will mean using data analytics and modeling that calls on the latest scientific evidence.
We expect risk and finance leaders to focus on increasingly sophisticated means of identifying and quantifying climate exposures. This is not simply a matter of being able to comply with increasingly onerous climate disclosure requirements. Quantifying climate exposures enables grounded discussions on the priorities for your strategy and the investment you’ll need to reduce that exposure.
We also expect more captives to explore innovative risk transfer mechanisms, such as parametric insurance, to address climate-related risks that may not be adequately covered by traditional insurance markets.
Over the past two decades, advanced data analytics have revolutionized risk assessment, underwriting, claims management and reporting. To position themselves for the next wave of risk management transformation, captives should prioritize deeper and wider digitalization. This will likely enhance your ability to adapt to evolving AI and machine learning technologies that will support increasingly refined risk, finance and risk management decision-making in the decades to come.
By leveraging advanced analytics tools today, captives can gain real-time insights into risk exposures, enabling you to identify and assess emerging risks, quantify potential impacts and develop more ever-more precisely tailored risk mitigation strategies. Both emerging risks and developing risk analytics capabilities will drive this continued risk management refinement.
Investing now in accessing robust data analytics capabilities and predictive modeling supports a more proactive and strategic risk management stance. These perspectives also lend themselves more readily to considering the cost of risk more broadly and over longer strategic timelines.
Data-driven optimization decision frameworks that allow you to explore the most efficient and effective risk optimization options for your captive program are likely to gain more prominence, particularly as corporate governance is holding executives to account for their decisions and ability to preserve long-term value.
Having access to robust, auditable, evidence-backed optimization methodologies will put captive managers in a stronger position to not only boost financial resilience in the face of complex risk finance trade-offs, but re-envision the overall risk finance approach and reveal unexplored value. Increasingly, this will be about evaluating risks to the business in one view. This is how you can apply the same portfolio perspective to risk finance options as the business does to investment decisions; defining success for risk finance decisions within a risk tolerance framework and enhancing financial resilience in line with your organization’s goals.
Over the past 20 years, captives have diversified beyond traditional property and casualty risks to encompass emerging risks such as cyber liability, supply chain disruptions and also employee benefits.
Looking ahead, we expect to see gathering momentum around trends such as multinational organizations deploying captives to achieve goals such as financing harmonized employee benefits programs across territories.
Such moves can both support effective people risk strategies and deliver against diversity, equity and inclusion organizational objectives. For example, we expect to see more multinationals using a captive to increase group medical plans’ annual limits or add benefits not typically offered in the local markets, or to overcome barriers to more inclusive benefits that reflect diverse family structures and dependents.
Discover a smarter way to manage and optimize your risk with captives supported by WTW’s global network of captive specialists. You can also access WTW actionable insights now — watch our Outsmarting Uncertainty risk management expert webinars on-demand.
A version of this article was first published by Captives International on Friday 8 March 2024.
