Placing risk through data and analytics

The pandemic has created almost unprecedented amounts of uncertainty within the risk management landscape and decision-makers are looking for viable alternative methods of handling risk, say Timothy Coomer, Michelle Bradley and Enoch Starnes of SIGMA Actuarial Consulting.

“The analysis itself may be the key driver in helping lower the total cost of risk.”

Timothy Coomer

The topic of “big data” continues to dominate headlines as an emerging risk-handling approach. The most important aspect of this trend is how the ensuing analytics are used to make better business decisions. We believe that proper utilisation of analytics is going to be crucial in establishing a competitive advantage across industries and especially vital in the analysis of alternative risk transfer options.

Due to the enterprise risk management efforts made in recent years, risk management departments and their brokers are starting to feel the pressure to “prove” that decisions are grounded in data and analytics. This is especially true for captives—in both the formative and the ongoing stages. Unfortunately, their ability to do so is lacking in many respects.

A few years ago, we conducted a survey of risk management departments concerning the use of analytics in the risk retention level decision process. This is an important step in determining a captive’s feasibility. The results of the survey, supplemented by our own experience, indicated a surprising lack of reliance on analytics in this decision.

While the risk management department, and specifically the risk retention decision, is just one part of a network of potential analytically-based, data-driven decisions within an organisation, it is perhaps indicative of the entire state of analytics throughout the industry.

“Roll-forward analyses can assist with understanding the growth rate of reserves.”

Enoch Starnes

Analysis matters

From a captive consulting perspective, the analytical sophistication of a company typically corresponds to its size. Smaller companies making important financial decisions tend to use a simplified decision method that might review guaranteed cost premiums versus estimated maximum costs at one or two retention levels.

Because the decision to consider risk retention is typically an effort to lower overall costs, there is resistance to pay for any type of analysis. However, the analysis itself may be the key driver in helping lower the total cost of risk. Increasingly, these types of smaller companies are also beginning to realise the potential benefits of captive formation and, thus, will need to adjust quickly to using analytics in both forming and strategically running the captive.

Some companies lack sufficient internal expertise to use or interpret analytics when optimising retentions and overall strategy. There are several ways to alleviate this issue, but perhaps the most cost-effective option is the education of those involved. If a company can use literature or video training to improve their own understanding of how to use analytics in a retention decision, they can move forward with the confidence that the whole organisation is obtaining maximum effectiveness from an analysis.

A couple areas of vulnerability may exist for companies that fail to employ analytics during the captive formation decision process. First, the stacking effect of collateral within a new captive insurance structure often produces surprises. Roll-forward analyses can assist with understanding the growth rate of reserves and the associated collateral at future intervals. Large claims occurring in the first few of years of a captive’s lifespan can also cause surprises, but adverse scenario analyses of initial pro-formas can assist in planning.

Another issue commonly arises from the parent company’s desire to place new risks into its captive. Without analysing the potential impact of those risks through simulated pro-forma models, a captive may find itself in a situation of being inadequately funded.

“Seek out educational videos and tools that can assist with understanding the analytics involved.”

Michelle Bradley

The way forward

SIGMA offers the following recommendations for companies, captive managers, or brokers involved in the analytics related to captive formation:

  1. Define and communicate the analytically based, data-driven process for captive formation, the associated risk retention, and the captive programme structure.
  2. Seek out educational videos and tools that can assist with understanding the analytics involved.
  3. Determine what industry analytics are available during the formation process and the ongoing management of a captive. This might involve third party claims administrator analytics, claim predictor analytics, and industry benchmarking analyses.
  4. Utilise risk analysis software to efficiently gauge optimum retention scenarios prior to pro-forma engagement.
  5. Design a one-page outline that summarises the retention decision methodology, both historically and prospectively.

Similarly, we offer the following recommendations for companies, captive managers, or brokers involved in the analytics related to ongoing captive management:

  1. Continue to evaluate and review adverse scenarios through pro-forma modeling on an annual basis.
  2. Perform regularly cadenced reviews of the captive’s risk portfolio using claim analytic software.
  3. Expand educational efforts to the captive’s board so that board members are aware of and understand the analytically based decision process.
  4. Embrace the use of analytics as a differentiator and the topic of “big data” and analytics as an ongoing captive strategy.

We are seeing an increasing trend for analytics usage in the captive insurance industry, but there is still plenty of room to grow. In fact, some brokers and consultants have indicated that they will not work with clients who are unwilling to follow a rigorous decision process.

It is not clear if this is motivated by an attempt to limit E&O exposure or simply to filter out clients that may be price-shopping and not truly interested in strategic, long-term approaches. Regardless, doing so establishes a baseline understanding and comfort with analytics that is vital for successful captives.

As we mentioned earlier, the confluence of a pandemic-driven hardening market and the increasing availability of data means that analytics is a hotter topic than ever. Ignoring this trend almost ensures being left behind in a captive insurance industry that is only becoming more sophisticated, and we encourage our readers to become educated, comfortable, and confident in the future of risk-based decision-making.

Timothy Coomer is chief executive officer at SIGMA Actuarial Consulting. He can be contacted at:

Michelle Bradley is a consulting actuary at SIGMA Actuarial Consulting. She can be contacted at:

Enoch Starnes is an actuarial analyst at SIGMA Actuarial Consulting. He can be contacted at:

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