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SOFT MARKET NOT DEATH KNELL

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BURLINGTON, Vt. -- One of the keys to the survival of captives in a soft market is the role they can play in crafting the most effective risk management program, an alternative risk transfer expert says.

Speaking on a panel on "Captive Survival Techniques in a Soft Market" earlier this month at the Vermont Captive Insurance Assn.'s annual conference in Burlington, Vt., James W. Hutchin noted that in today's market, one can make a case that the traditional reasons for forming captives no longer apply.

Among those traditional reasons were access to reinsurance markets, pre-funding uninsurable exposures, as a risk management allocation tool, or to reduce frictional costs by getting more efficient access to insurance capacity, said Mr. Hutchin, managing partner at IRMG Risk Advisory & Captive Management Services in Fort Lee, N.J.

But, though in today's market a case could be made for why any of those reasons no longer hold true, Mr. Hutchin emphasized, "The real beauty of the captive solution is the ability for client-specific solutions."

What's more, using a captive can create a more efficient risk management program. "When you put a captive in place in your organization you fundamentally change the corporate view of risk in your organization," Mr. Hutchin said.

The "profit and loss" approach that comes with a captive garners much more respect in an organ-ization than the "cost center" approach that can develop around a risk management program without one, Mr. Hutchin suggested.

Richard H. Hamilton, president and general manager of CSX Insurance Co. in Burlington, noted that despite a soft market, captive owners are continuing to look for ways to optimize the financial benefits captives can provide.

At the same time, Mr. Hamilton said, captive owners also are interested in preserving the "qualitative" benefits captives can offer, such as the improved loss forecasting and safety focus a captive can bring an organization, consistent retentions across business units, and coordinated claims adjusting services.

It's that sort of sentiment that's driving captive owners' efforts to find new ways to use them, Mr. Hutchin said. "There's tremendous buyer pressure," he said.

New captive uses could include life insurance captives, special purpose vehicles, such as those being used to facilitate risk securitization, or captives formed as a "holding tank" for a holistic risk management approach that deals with managing risks across an organization's entire spectrum of exposures, Mr. Hutchin said.

In that latter case, a captive provides a good framework in which an organization can assess how much risk it can retain, how much it should retain and how it can lay off the risk it doesn't want.

"We like to think that captive ownership facilitates this view of risk, and it facilitates implementation of the associated solutions," Mr. Hutchin said.

Using a captive to implement such holistic risk management strategies is one way to optimize captives' financial benefits, Mr. Hamilton said. Others could include using captives to facilitate risk securitization, insuring significant vendor risks into a captive or to reduce federal excise tax liabilities by placing coverage that otherwise would be ceded to Bermuda or European markets into the domestic captive, Mr. Hamilton said.

Even if a company has a captive, he noted, "Analysis of commercial options is very important," with the results of that analysis offering an additional way to optimize a captive's financial benefits.

On the qualitative benefit side, a captive "really facilitates focusing senior management attention on your losses and therefore on your safety program," Mr. Hamilton said.

New insurance programs and coverages in the market that can work in conjunction with a captive provide other ways to increase the chances of captive survivability in a soft market, said Patricia T. Jodry, vp at CIGNA Risk Solutions in New York.

Integrated risk programs are one such approach, Ms. Jodry said, adding that approximately 30% of these customized risk programs crafted to date have involved a captive.

Such integrated approaches can incorporate non-event risks, such as foreign exchange risk, or "hot covers," such as employment practices liability, workplace violence or products recall, into an overall program that includes more traditional risks.

"I think in the future there's going to be more of that, because I think more people are going to see the benefit of using these programs behind a captive," Ms. Jodry said.

Such programs must stem from a focused risk management strategy, however, Ms. Jodry cautioned. "These programs work only because they fit a need that you have," she said.

And Mr. Hamilton suggested that however effective an organization's insurance program might be, it's always necessary to look at other possibilities.

"We should look very closely at our current options vs. the alternatives that are available," he said. "It never makes sense to stand still."