A captive has a unique opportunity to provide elements of supply chain coverage to its parent group and facilitate innovative and valuable risk financing in an area the commercial market often struggles to respond, according to Dan Sammons, captive manager for HDI in the United Kingdom and Ireland.

Speaking on the latest episode of the Global Captive Podcast, Sammons was joined by colleague Kate Sutcliffe, chief underwriting officer for short tail business at the industrial insurer.

“Captives are involved where they need, or there’s a requirement, for a breadth of coverage that insurance companies can’t realistically provide,” Sammons said.

“I see captives having a key role in providing that breadth of coverage that gives the business a greater scope, not just with supplier extension, but protection against those unknown risks.

“Perhaps not stretching quite as far as non-damage BI, but towards those realms of risks that do exist, but are difficult to anticipate, difficult to get the data required that would give an insurance company like us the comfort we need and the data we need to be able to price it effectively.”

Sutcliffe said one of the most interesting cases she has seen concerning supply chain was where the insured had suffered a loss of market share, due to a supplier being unable to deliver the product.

“It was not going to be covered under a property programme, there was no material damage trigger,” she explained on the podcast.

“However, the insured was suffering a financial loss because they had lost their market share and their product wasn’t worth it. When they decided to do a little bit of a look-through their claims, they decided this is an area they’d wanted to cover going forward, but because it was deemed a financial risk and not an insurable risk to a property underwriter, we could not help them provide a net coverage.”

The company did have its own captive, however, and had been growing its size and role in the preceding years.

“From the conversations that we’d all had together, they decided to put a small element of loss of market value into their captive programme to provide indemnity for the insured going forward that should they ever have that type of loss or that claim again, that they would have some coverage available.”

Sammons said he believes combining the fronting insurer with an ART or structured reinsurance placement to support the captive is the “go-to” strategy increasingly, not just for supply chain but other programmes as well.

“It’s a conversation to be had with the fronting insurer,” Sammons added.

“If you’re lucky enough to have a fronting insurer that works very closely with their ART team, you are looking to work with the fronting insurer to add an endorsement or add a coverage within their property policy, or even their liability policy, to cover these unusual requests and then working on the ART side to perhaps put in a structured reinsurance to spread the cost of a loss over a number of years just to soften that single year risk.

“I really see that as the go-forward for position for captives these days is that combination of structured reinsurance, and a flexible fronting insurer that’s prepared to evolve and innovate alongside the captive and the risk manager as well.”

Listen to the full discussion on supply chain and captives on the latest episode of the Global Captive Podcast here, or on any podcast app. Just search for ‘Global Captive Podcast’.