The majority of Verizon Communications Inc.'s risk management activities are contained within its captives, which serve as the “cornerstone” of the company's risk management strategy, said Paul Johnson, director of captive operations for Verizon.

The company's three captives — Exchange Indemnity Co., which is domiciled in Vermont, Exchange Indemnity Co. New Jersey and Exchange Indemnity Co. New York — take in almost three-quarters of the company's risk management budget.

Like his supervisor David G. Cammarata, Verizon's assistant treasurer for risk management and insurance, Mr. Johnson sees the value in his finance background when it comes to running Verizon's captives.

“I think having a financial background is a good thing,” Mr. Johnson said. “Capital budgeting, cash flow, dividends are all important, as is understanding what is the right capital structure for the captive.”

Mr. Johnson credits Mr. Cammarata with driving modernization of the captives' operations as part of a financial overhaul of the entire company. “Verizon is going through a lot of financial transformation throughout the organization, and that has affected our captives,” Mr. Johnson said. “Mechanizing the operation of financial statements was a big accomplishment under Dave's tenure.”

Captives are used to cost-effectively retain risks and achieve a lower cost of risk for Verizon, he said. Such retentions avoids insurers' overheads and their profit margin and provides tax benefits as well.

“We do run about 21 programs annually through the captives, and a very large portion of our risk management budget is paid to the captives in the form of premiums,” Mr. Johnson said.

Among the programs run through the captives are casualty, global property, employment practices and patent infringements, as well as affinity programs including supplemental life, group home, and auto programs.

Examples of risks not retained by the captives would include patent insurance and adverse regulatory changes.

Verizon does not publicly disclose financial details for its captives. The last financial information available is from the fiscal year ending Sept. 30, 2010, when Verizon was lobbying the U.S. Labor Department to use its Vermont captive to reinsure group term life benefits.

At that time, Exchange Indemnity Co. reported $918 million in gross annual premiums and $1.7 billion in assets.

The company retains a great deal of its own risks.

“We endeavor to retain what we expect to lose,” Mr. Johnson said. “So generally, anything that is predictable, we seek to retain in a captive, and if it is catastrophic, we seek to transfer it out.”

Low-frequency and low-severity losses, such as minor property damage below defined property insurance deductible levels, will typically be retained by Verizon business units.

Certain high-frequency, low-severity losses are also handled through the captives, including workers compensation, automobile liability and general liability insurance. The company has a large deductible program and self-insures more than 99% of the losses for these types of liabilities.

“Our loss history is pretty significant, so we're able to generate an accurate loss picture and price risk, and we try to retain as much as we expect to lose rather than trade dollars with a commercial carrier,” said Mr. Johnson.

“Mechanizing, streamlining, accelerating the close, beefing up internal controls — these are all things we've been working very hard to do,” he added. “Under (Mr. Cammarata's) leadership, we continue to look at internal controls and documentation.”

In addition to covering much of the company's risks, Verizon's captives have become a profit center for the company, generating revenue by taking on lines closely related to the company's primary business such as its handset insurance, which attracts millions of customers.

The captives also provide homeowner's insurance and automobile liability insurance to Verizon employees through reinsurance agreements with the primary insurers. “Our captives were among the first to participate in group home and auto programs,” Mr. Johnson said.

There is potential for expansion, he said. “We do have an appetite for related unrelated risks,” he said. “It must be related, something consistent with our overall risk profile.”

“We're always looking at opportunities in the captives area,” Mr. Cammarata said. “It's got to be something we feel very comfortable with.”

Verizon has set up a program with Burlington, Vermont-based Marsh Management Services Inc., the manager of its Vermont captive, to cultivate ideas for new captive opportunities. “We're setting up a process where twice a year we're going to look at opportunities,” Mr. Cammarata said.