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Captive insurers provide owners with key risk management tools

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BOCA RATON, Fla. — Captive insurers can be used to develop sophisticated risk management and claims management strategies that go far beyond self-insurance and risk retention.

Captives can be the foundation of an enterprise risk management program as well as claims reduction and safety programs that lead to significant cost savings, captive experts say.

Captives are an excellent structure to test and run an ERM program, said insurance and captives consultant Michael Maglaras, principal of Michael Maglaras & Co. in Ashford, Connecticut.

One of the main advantages of having a captive involved in ERM is that most single-parent captives are fully consolidated subsidiaries of their parent companies, so any efforts that reduce claims and other risk-related expenses have a direct effect on the balance sheet of the parent, he said during the World Captive Forum in Boca Raton, Florida, earlier this month.

Captives are useful tools to determine what exposures should be insured or self-insured.

“Captives are all about analysis and understanding balance-sheet management,” Mr. Maglaras said.

In addition, captive boards usually are made up of experts drawn from a diverse range of disciplines, including financial and executive leaders from the parent company, who must be included in successful ERM program management, he said. “You need a broad-based view to control enterprise risk.”

Using a captive as part of an ERM program also helps create an organizational culture that focuses on risk, said Ruth Cardiello, vice president of enterprise risk management of Stamford Health System Inc. in Stamford, Connecticut.

For example, physicians and therapists working for the health care provider are conducting more home visits for patients who can’t travel. With the multidisciplinary captive board, the captive and the organization could address the related exposures before being confronted with losses, she said.

“Five years ago, I would have heard about (the increased home visits) after an incident occurred,” Ms. Cardiello said.

The claims management and insurance pricing functions of a captive also are vital to run an effective ERM program, Mr. Maglaras said.

Claims management is a vital part of any risk management program, and captives can be used as effective claims management tools, said Christopher Mandel, senior vice president of strategic solutions at Sedgwick Claims Management Services Inc. in Nashville, Tennessee.

“Monitoring and reporting claims is where it all comes out in the wash,” he said. Captives can be a vital tool to get “the right information to the right recipients at the right time.”

DirecTV Inc. used claims data from the past several years and data from its Hawaii-domiciled captive, Palm Insurance Co. Inc., to help it manage claims more aggressively for its installation crews, said Chris Burgee, vice president finance/risk management at the El Segundo, California-based satellite TV provider.

While the installation workers were sources of significant risk because they climb ladders, climb on roofs and drive trucks, he said DirecTV used the claims data identified to implement changes to its safety programs, its training programs and its return-to-work strategy, Mr. Burgee said.

And having the data available helped secure management support for the changes. “We have the data so senior management buys into it” and the data provides an aggregated look at the company’s claims performance, he said.

Through analysis of the data, falling from elevation was identified as DirecTV’s major cost driver of claims. As a result, the company invested in additional safety equipment, developing its own when none was available, and implemented a fall protection plan for its crews, Mr. Burgee said.

The claims data also showed opportunities to improve fleet risks. DirecTV provided additional training to drivers, added GPS to its vehicles and instituted a Drivers Alert program in which trucks have a sticker on the back asking other road users to comment on the driving.

Over a three-year period, the safety changes resulted in a 43% reduction in calls on the Driver Alert phone line, he said.

The data also found delays in reporting claims and lengthy lost time due to worker injuries. As a result, the company implemented a formal return-to-work program, which resulted in a significant decrease in lost time, and used additional training on claims reporting to reach the point where 91% of claims now are reported within three days of an incident, Mr. Burgee said.

As a result of all the changes the company saw significant reductions in loss and other costs.