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Global risks can affect captive insurer owners from afar

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BOCA RATON, Fla. — Captive owners should review the risks they cover in light of recent changes in the geopolitical, economic, environmental and societal risks, captive experts say.

Growing border conflicts, such as in Crimea in 2014, and ongoing regional conflicts involving the Islamic State group create supply chain risks that can affect captive owners located far from those regions, they said.

In addition, economic changes such as fiscal crises and related infrastructure failures, climate change risks and societal risks also have implications for captives, said Linda Conrad, New York-based director of strategic business risk at Zurich Global Corporate, a unit of Zurich Insurance Group Ltd., and Christopher J. Lay, London-based president of global captive solutions at Marsh L.L.C., speaking at the 25th annual World Captive Forum in Boca Raton, Florida, on Wednesday.

Citing the World Economic Forum Global Risks 2015 report, they said geopolitical and economic risks pose the biggest short-term threats, while societal and environmental risks are the biggest long-term threats to businesses.

Crises in key economies “certainly have an impact on our business, whether we are manufacturing there, whether we are selling there or whether we are supplying there,” Ms. Conrad said. For example, more business partners may go bankrupt in affected countries, so credit risks could increase.

Financial problems in certain regions of the world could increase the cost of purchasing local coverage under global programs. During a fiscal crisis, “countries are looking for ways to make money, and so we anticipate there will be increased taxes on captives and on insurance as they try to make up those gaps,” she said.

Failure of critical infrastructure in countries that curb infrastructure spending during fiscal crises also can increase risks for captives, she said. Property, equipment and supply chain risks, among other things, can increase as a result of infrastructure problems.

Societal risks, such as the spread of infectious diseases, also can increase exposures for captives covering supply chain risks, said Mr. Lay of Marsh.

And captive owners need to consider how they can manage that risk, he said. “How do we model that catastrophe from a health care perspective? … it drives captive owners to take a more enterprise approach to risk, maybe looking at captives as an aggregator for insurable risk,” he said.

Captive owners may want to increase the risks they take on in their captives as exposures increase as a result of the changes, Ms. Conrad said.

In addition, captive owners may want to take on additional uncorrelated risks, such as employee benefits risks, to balance out increased risks in other areas, such as increased property exposures stemming from climate change, she said. “From a strategic perspective, that makes good sense in your captive.”

Uncorrelated risks, such as political risk, business continuity planning and supply chain risk, may also be derived from covering increased exposures result from geopolitical changes, Ms. Conrad said.