Welcome to the wonderful world of captives

Throughout my time in the industry, I’ve encountered very few people who intended to assume insurance as their career of choice. Many of us somehow found our way here as part of a meandering quixotic journey as young professionals trying to find occupational meaning in our lives.

I actually studied public administration in college while dreaming of a career in city management upon graduation. After completing a pre-graduation practicum, I was confronted with the realisation that a city manager can be stuck in the thankless crevasse (aka: between a rock and a hard place) between public servitude and having to placate elected officials with conflicting personal political agendas. That wasn’t going to fly for me.

Following a few years of nomadic career navigation, I was approached by a (very prosperous) family friend who told me that I needed consider a career in insurance.

My impression of the insurance industry at the time was of a guy sitting at a desk in a plaid suit doing the old “smile and dial” phone routine trying to convince family, friends and neighbours that he could solve all of their auto, home and life coverage needs for them. Little did I know, there was much more to the insurance world than simply pounding the pavement for personal lines.

The captive insurance industry has become one of the most dynamic, important and fastest-growing segments in the insurance industry over the past two decades. Welcome to the wonderful world of alternative risk transfer!

Even though our business is classified as “insurance” the entire basis of the captive industry is actually predicated on how to buy less insurance. The captive insurance industry centres on rethinking how risk can be more accurately defined and then structuring a more efficient way to finance risk rather than simply buying insurance.

The objective is to strike the most effective balance between risk assumption and risk transfer. This is accomplished by having an entity retain budgetable and predictable segments of risk while continuing to transfer the more unpredictable segments of risk to an insurance company.

Captive insurance explained

The basic premise of insurance is to protect an entity against unforeseen or unpredictable losses. Insurance companies have two basic ways to make money: underwriting profit—paying out less in claims than they collect in premium; and investment returns—investing premium funds until they are needed to pay claims.

At some levels, loss exposure becomes increasingly predicable and, in many cases, it makes more sense for an entity to simply assume these predicable segments risk and budget for the expected expense rather than to swap dollars for insurance coverage which includes insurer expenses and profit charges. Since most insurance companies don’t altruistically return profits to their insureds, many are among the largest and most profitable corporate entities in the world.

In its simplest form, a captive is a mini-insurance company that has been established by a larger entity (the captive parent) to insure its own risks. The captive is a financial vehicle that helps an entity to retain predictable (and budgetable) segments of risk by converting it into defined layers of insurance.

Amounts of expected claims are redefined as an annual dollar amount and converted into insurance premiums to the captive insurance company. Claims are then paid by the captive insurance company owned by the insured entity.

At the end of the year (or policy period) the underwriting profit and investment returns can be converted into surplus and used to fund future risk or distributed as dividend returns to the parent. This allows the captive insurance company to assume risk, collect premiums from its parent and then keep any profits derived from functioning like a traditional insurance company.

Something for everyone

Since most captives are not equipped with the internal staffing resources to needed to operate as an insurance company, these functions need to be outsourced. This creates an enormous wealth of diverse occupational opportunities throughout the industry.

More than 50 percent of captive industry practitioners are set to retire within the next 10 years. This creates an immense need and opportunity for good young professionals to enter the industry and quickly advance both professionally and economically.

Captives operate in just about every traditional coverage segment of the industry: property, casualty, accident and health. One of the main functions of a captive is to deliver insurance capacity more efficiently than traditional insurance markets where coverage is either unavailable or inordinately expensive. This opens the door to coverage ingenuity and creativity.

Captives are increasingly used to finance and unique and emerging risks such as cyber, parametric and even pandemic exposures.

As with any segment in the insurance industry, captives need to have both technical and non-technical staff. There is something that can appeal to just about any type of personality and satisfy any intellectual interest level. Technical pursuits generally include accounting, actuarial, underwriting, data analytics, and claims. Non-technical positions can vary but will probably focus more on business development, especially for group captives.

One of the characteristics of this industry that I enjoy the most is that it is a very collegial industry. We comprise many independent but interdependent components. Most captives are composed of separate operational elements such as accounting, audit, domicile management, legal, reinsurance, etc.

This unbundled structure allows a captive to assemble the best service components to optimise its operational efficiency. Because each component needs to function in harmonious collaboration, captive service professionals—including competitors—throughout the industry tend to be very supportive of one another.

Advice for young professionals

Professionals with accounting, actuarial and financial backgrounds can enter the captive insurance industry quite easily because of the specific nature of the work.

For most other positions, it’s good to spend time gaining base-level experience in more traditional segments of the commercial insurance industry. This will help foster a deeper understanding of specific lines of business and traditional insurance structures before moving on to specialise in alternative risk.

Develop your network. Given the unbundled nature of the captive industry, development of your professional network is one of the most essential elements of success. It’s important to develop a strong foundational network of trusted contacts within each specialised service segment and across the industry.

Get involved, be a resource, and contribute value to your network. As I mentioned before, this is a very collegial industry. It is important to realise that you cannot operate in a vacuum independently from one another. Learn to be a resource and contribute professional value and expertise throughout the industry. Success, both individually and as an industry, is predicated on how well we can capitalise on the collective insights (experience, expertise, opinions) of others through open-minded collaboration.

Keep challenging yourself. Never think that you are or will ever be “good enough”. Professionally, life is like lifting weights: the more you push, the stronger you get. But you need to keep adding weights to keep getting stronger.

I’m a big proponent of continuing education, whether it’s pursuing a professional designation such as Chartered Property Casualty Underwriter, Certified Employee Benefit Specialist, or a Certificate in Captive Insurance from the International Center for Captive Insurance Education, or regularly attending good educational seminars—we owe it to our clients and colleagues to present as subject matter experts within our vocation.

I have always included continuing education key performance objectives in the job descriptions for each person on my team to help foster the expertise in our industry segment.

Find a mentor and learn to be a mentor. This is a highly dynamic and constantly evolving industry. We need to continually learn and keep pace with changing dynamics. Find a good mentor early on and learn to become a mentor and then share your knowledge freely as you grow. Promote new entrants, youth and diversity. Mentorship of the next generation is important. Perpetuate a positive legacy within the industry—and they will then do the same.

You should also realise that as alternative risk professionals, we are stewards of the captive industry. We are each responsible for perpetuating continuous development, growth and evolution of our industry.

Part of our promise to our clients and colleagues is to contribute our time and expertise to the betterment of this industry as a whole. Throughout your career, always strive to participate and make valuable contributions to help leave the industry better than it was when you entered it.

Phillip Giles is the managing director of MSL Captive Solutions. He can be contacted at: phillip.giles@mslcaptives.com