Utilising a captive to put a more formal structure around previously uninsured risks is becoming more common, according to Matthew Latham, risk transfer leader in the financial solutions group at Marsh.
Latham joined Marsh in December 2021, having previously worked on the captive fronting and global programmes side of the business with AXA XL, AIG and Ace for the past 20 years.
His team works closely with analytics colleagues on risk finance optimization (RFO), assessing a client’s ability to retain risk, their risk tolerance and appetite.
“We do the analytical work on their losses and work with the placement brokers to understand what it would cost to transfer the risk into the market,” Latham said, speaking on episode #94 of the Global Captive Podcast.
“We try and find the optimum point of which risk they would like to retain and which they would want to transfer. That then leads to a programme design discussion and sometimes we’ll suggest some innovative solutions.
“One part of the transaction piece is that we look to place non-traditional insurance, or reinsurance more normally into the market. It’s going to be a combination of lines of business, not just one individual line so multi-line, or it could be multi-year.”
Latham said around 75% of the programmes they work on with clients will have a captive involved in the solution with risk incubation becoming increasingly common. In such cases, he works closely with the Marsh Captive Solutions team.
“They’re wanting to utilise their captives for more risks and they’re wanting to see how they can take a risk which is currently uninsured on their balance sheet and put some more structure around it,” he explained.
“You can gather data, you can bring the company’s focus onto that risk, give it a bit of a spotlight.
“Over a period of time with the captive underwriting that risk, you can get to the point where you could be able to take it to an insurance market to actually start to take some real risk transfer once you understand that risk better and you’ve put in place risk mitigation measures.
“The alternative would be you carry on retaining it on your balance sheet, but you would then have to take the volatility on your balance sheet. Say it was the type of risk where you might have a loss once every 10 years, you have nine years with no hits to earnings, and then you have a hit to your earnings.
“If you’re putting it in your captive, you can have some budget stability over that period of time, build up reserves, and then when the loss happens, the captive takes that rather than have it on the balance sheet of the operating companies. It also provides the captive with a bit of extra diversification.”
Listen to the full interview with Matthew Latham from 27 minutes into episode 94 of the Global Captive Podcast, here on Captive Intelligence or any podcast app. Just search for ‘Global Captive Podcast’ and hit follow or ‘subscribe’.