Destined for greatness
The company that manages its capital manages its destiny
Many corporate entities, individually or as part of industry organisations, have already identified the strategic competitive advantage of using their own capital to manage and finance the risks that expose their building blocks. Capital comes in many forms, some of which are measured through financial accounting mechanisms, others of which are not.
Regardless, capital, in all of its forms is aggregated and deployed in the execution of business strategies. Protecting and leveraging a capital foundation is an essential discipline, frequently performed by risk management functions.
Taking these practices to the next level is an incredible opportunity to optimise the financial benefits as well as to strategically focus, adapt, and innovate for the future of the enterprise.
Most captive insurance programmes began with addressing specific insurance or ‘hazard’ risk exposures. Hazard risks are frequently addressed or managed via insurance for first- or third-party operational exposures. This includes workers’ compensation, general liability (including professional and/or products and completed operations), and often property coverages.
In addition to the tangible financial benefits, additional operational benefits and impacts have been achieved with these programmes, including establishing accountability for loss control and claim outcomes, centralisation of risk management operations, risk data aggregation, and risk management cost efficiencies.
They can also provide a platform for dialogue and collaboration across the enterprise on topics such as traditional risk management, enterprise risk management, and sharing of best operational practices.
Many evolved from commercial insurance market fluctuations where traditional insurance was not available, or not available on an affordable basis, or where adequate coverage limits were not available. Captive insurance proved to be successful in addressing the market voids and, when properly managed, the captives’ underwriting operations began to build additional financial capital.
Changing times call for changing companies
Additional roles for the captive lie in several areas, which have evolved over time and are associated with emerging risks in a rapidly changing business, economic and operational environments. The rapidly escalating costs of providing health care insurance to employees and their dependents can be managed by utilising a captive insurance entity as a financing hub for self-funding of certain employee benefit programmes.
Structuring and financing insurance programmes for emerging risks such as cyber risk and reputational risk can be accomplished with a captive insurance entity. Non-insurance risk mitigation programmes can be financed and facilitated by a captive as well.
Over time, the risk assumption programmes provided by a captive insurance entity can develop significant financial assets, which may be available to strategically reinvest or deploy in a variety of related services or risk products and solutions.
At HAI Group, the group captive earned surplus has been utilised to create businesses and solutions for the housing industry that are outside of the insurance world. Examples include industry research programmes, distance and online learning solutions, as well as programmes to assist in the attraction of financial capital for the development and redevelopment initiatives of its members and owners.
Thinking about strategy
On the leading edge of change, a captive insurance entity or subsidiary can be an effective vehicle for implementing strategy. Strategy begins with a vision statement, which provides an over-arching, aspirational goal or direction for the business entity. A focused mission statement is a concise statement about what the current direction of the business entity.
A core set of values provides a context for how the business entity accomplishes its mission. Values drive employee and organisational behaviors. Behaviours create and reinforce corporate culture. The business entity’s vision, mission, values, and culture are the foundation for developing and executing strategy.
When the owner of a captive, whether a single entity or group of entities, aligns its captive operations with the foundational elements and strategic directions, significant value is created through the delivery of the owner’s products and services, as well as facilitating effective and efficient operational outcomes.
Utilising the captive can help to achieve an organisation’s mission, preparing for and moving towards reaching its vision. Staying focused on the company’s vision and mission helps build and reinforces the fundamentals, adding to the stability created through an aligned group of companies.