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BURLINGTON, Vt.-In today's highly entrepreneurial and budget-driven style of management, a captive insurance company can be an important tool by providing a flexible vehicle for bearing an organization's risks.

Beyond traditional insurance risks, a captive with the flexibility to underwrite the "unusual and the unique" can provide a way of covering such risks as foreign currency exposures, commodity exposures, interest rate variations, weather variations, warranty and product recall exposures and patent and copyright infringement risks.

"People have been talking about this for a very long time," said Scott M. Sanderson, a vp at J&H Marsh & McLennan Inc. in Minneapolis, who spoke on a panel during the Vermont Captive Insurance Assn.'s annual conference in Burlington, Vt., Aug. 13.

"Say you're an airline," Mr. Sanderson said. "I would say the price of jet fuel is much more important to you than the cost of workers comp claims."

"Really anything that's calculable is the subject of potential coverage in a captive insurance company," he said. "And 'calculable' is important."

If those exposures can be calculated they can be included in an integrated risk financing program, Mr. Sanderson said. Multi-year, integrated coverage would sit between annual aggregate retentions and annual towers of excess property and casualty coverage, he explained, labeling such a program a "RiskFusion Structure."

Using a captive to assume the annual aggregate retentions offers a company several advantages, among them allowing the captive to allocate premium to the parent company's various operating units. "If we want each of these operating companies to be very entrepreneurial this is the way to do it," Mr. Sanderson said.

The sorts of risks that could be retained by the captive as part of that aggregate retention are limited only by imagination and the ability to understand the risk, Mr. Sanderson said.

"Just throwing in the risk isn't enough," he cautioned. "You need to understand what it is and how it reacts."

Mathematical simulations and studying joint probability and correlation impact are key steps in determining what risks are appropriate candidates for placing in the captive, Mr. Sanderson.

John P. Yonkunas, an actuary with Tillinghast-Towers Perrin in Weatogue, Conn., noted that within many organizations today there might be several risk strategies and risk appetites, and offering a way to connect them in the captive is another way for a risk manager to increase his or her value to the organization.

In the middle of the risk management process, he noted, are the

corporation's strategic objectives, with that risk management process including risk identification and risk assessment and risk financing.

"The assessment of risk is a very key cog in underwriting unique and unusual risks," said Mr. Yonkunas.

The strategic objectives that can help determine the shape of the risk management decisions, meanwhile, could include such things as the financial integrity of the organization, public relations or shareholder value.

Mr. Yonkunas set out a "risk exposure mapping profile" as one way of evaluating risks and how to address them. With severity graphed along one axis and frequency along the other, risks of low severity and frequency might be paid as routine expenses, while those of high severity and low frequency might be subject to hedging techniques.

Those of low severity and high frequency might lend themselves best to efforts to manage the exposures, he suggested, while those of high frequency and high severity might call for all-out risk avoidance efforts, according to Mr. Yonkunas.

Depending on the nature of the "unusual and unique" exposures covered through the captive and the relationship between the captive and the insured entity, there are various financial reporting considerations, noted Dave Tatlock, senior manager with Johnson Lambert & Co. in Burlington.

Such issues as risk transfer are key to determining when insurance or reinsurance accounting is applicable vs. deposit accounting.

"In order to use reinsurance accounting you actually have to jump through a couple of hoops," Mr. Tatlock said.

Among other things, it must be reasonably possible that the reinsurer may realize a significant loss from the transaction and the insurance risk must include the transfer of both underwriting and timing risk.

Charlotte Manca-Wells, vp of Adventist Risk Management Inc. in Silver Spring, Md., was moderator and coordinator of the session.