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Risk managers using captives to cover emerging risks

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ORLANDO, Fla. — Risk managers are looking to mitigate exposures from emerging risks such as cyber liability and reputational risk through the use of captive structures.

Trade credit and political risks are other exposures for which companies and organizations are looking more often to the company-owned insurers for coverage.

“There definitely is an increase in submissions and interest” to use captives for political risk, David Anderson, senior vice president and director of global business development for trade and political risk at Zurich North America, said during the Captive Insurance Cos. Association's 2015 International Conference.

Political risk insurance still is considered a “nontraditional product” in the captive community, even though more than 40% of those attending the conference session said they already use captives for these types of risks. “I think that demonstrates the higher level of interest,” Mr. Anderson said.

“It's become clear that a cyber security breach can lead to substantial liabilities and costs,” Joseph Holahan, of counsel at Morris, Manning & Martin L.L.P. in Washington, said during the March 8-10 conference. “So the insurance industry has responded to these risks, and that includes the captives industry.

The National Association of Social Workers' NASW Assurance Services Inc. is a for-profit unit that manages a risk retention group, NASW Risk Retention Group Inc., for the nonprofit agency with 140,000 members nationwide, said Philip Lawson, development solutions leader at NASW Assurance Services in Frederick, Maryland.

The agency created a captive in 2008 and a risk retention group in 2012 to generate underwriting profit and achieve greater transparency and flexibility, said Mr. Lawson

The agency's move into the cyber space was driven by “requests over about a year and a half from our members to address the cyber liability issue,” Mr. Lawson said. “So we created a cyber liability policy and launched it in July.”

The cyber product has sold very well, he said. Twenty-three percent of members who buy professional liability coverage through the RRG also have opted for the cyber coverage, which covers data notification, legal defense costs and some fines and penalties with a $12,000 limit, he said.

County Reinsurance Ltd., a Vermont-domiciled group captive established in 1997 to reinsure county government pools, is member-owned and provides coverage only to those members that contribute equity, said Philip Bell, Clemmons, North Carolina executive director of the captive.

County Reinsurance, which technically is a nonprofit mutual, provides property, liability and workers compensation coverage in 17 states, said Mr. Bell.

After studying the “complicated topic” for 18-24 months, it began offering cyber liability coverage last July, Mr. Bell said during the conference in Orlando, Florida. Coverage includes legal counsel, fines and costs (subject to sublimits), and third-party liability with a $1 million limit and options for higher limits via retrocession.

Peter Gerken, senior vice president of Steel City Re in Pittsburgh, said reputational risk is another coverage captives can offer.

“Captives can indeed insure this risk, helping to manage it and insure it, and in so doing they can help increase enterprise value,” Mr. Gerken said.

Based on Steel City data, he said a reputational crisis can shave about 7% on average from a company's market capitalization.

“Reputation needs to be addressed on a risk mitigation and risk management basis,” Mr. Gerken said.

“We do believe that captives not only can be used to mitigate loss but actually can be a vehicle that helps create value,” said John Kelly, New York-based managing partner at Hanover Stone Partners L.L.C. “It is an effective and tax-advantaged manner of retaining and managing risk with the potential for underwriting profit.”