Building an innovative environment

As we are a mid-sized consulting firm, everyone on the SIGMA team develops experience with the traditional lines of coverage as well as newer, cutting-edge coverages. This breadth of experience allows SIGMA to provide robust consulting to support the captive industry.

We complement our consulting with an educational component granting our users practical knowledge on how to best implement analytics in the captive realm. These educational tools can be accessed through our online RISK66 portal, which includes both documents and training videos on captive-specific topics and analytical tools like Loss Forecaster (for loss projections) and LORAN (for loss run metrics).

With an increasingly complex and hardening insurance market, our staff is focused on educational efforts to assist captive professionals in effectively evaluating alternative risk transfer options.

We have written articles on how to analyse loss development patterns for captives, how to evaluate captive retention structures in a hard market, and ways to use and improve reserve analyses for captives.

SIGMA has also produced a new captive brochure to highlight key issues and summarise the analytical process for captive formation. Included within the brochure is a high-level captive overview, answers to fundamental questions relating to captive formation, and a listing of SIGMA’s analytical capabilities in the captive area, as well as various data requirements.

Our ongoing Lunch and Learn webinars have included captive-specific information to benefit our audience members interested in captive formation. As an example, a July 2021 webinar focused on the key items to look for when selecting a captive domicile and reviewed high-level information for one onshore domicile and one offshore domicile as examples.

The response to these innovative efforts has been strong. In 2021, our educational webinars have averaged approximately 100 registrants per session, and feedback on our new captive brochure highlights that we deliver easy-to-understand material that is free of actuarial jargon. We believe that, to navigate challenges, clients must first understand the analytics and approaches they already have in place.

Beyond the annual actuarial reports required by regulators, we would like to see the captive industry integrate analytical solutions into ongoing decision-making strategies.

To help create this environment, SIGMA staff assist clients in understanding how captives can be used as a long-term strategy, as opposed to a short-term solution to current market conditions. Our approach gives clients access to educational resources, consulting, and software tools to navigate the challenges of creating a sustainable, long-term captive approach.

Companies are normally required to complete pro-forma analyses as part of the feasibility process during captive formation.

Our approach encourages clients to use the analytics created during this step in a strategic, continuous process. Scenario testing, advanced pro-forma modelling, and stress tests are all examples of analyses that benefit captives on an annual basis.

Ultimately, the captive insurance industry should focus on continuous improvement through experience and innovation, and these aspects can only be produced by professionals who have spent a substantial amount of time within the evolving captive landscape.

By guiding our clients through the analytical steps necessary for a long-term captive solution, we can play a role in building an increasingly innovative industry.

The actuarial profession has ongoing continuing education requirements that help maintain compliance with current and emerging issues, including regulatory changes.

Our staff with captive-specific expertise attend continuing education seminars on relevant captive regulation topics. For National Association of Insurance Commissioners (NAIC)-related issues, SIGMA has a credentialed actuary with a regulatory background to help ensure compliance changes are understood and accounted for.

In the captive area, SIGMA completes actuarial reports and feasibility studies, and we also serve as a reviewing actuarial firm for multiple domiciles. The regulation takes many forms and extends beyond just domicile regulators—such as the NAIC, the Internal Revenue Service, and various accounting regulations. Some domiciles defer to other regulatory entities on certain policies. SIGMA has ongoing dialogue with captive regulators to maintain compliance.

SIGMA felt an immediate and strong interest from clients for analytical assistance in navigating the effect of COVID-19 on workers’ compensation, medical professional liability, and other casualty risks.

After more than a year of analysing pandemic claims, the methodology has evolved as more data points have become available. While the long-term impacts are still uncertain, we are able to more easily quantify the short-term trends that we’ve seen in individual clients, such as changes in loss development, payment patterns and reporting lag.

We have also seen a significant increase in interest in captive formation due to the hardening market. Since the state of the market has been exacerbated by the pandemic, more companies are exploring alternative risk transfer options.

While the overall analytical work has increased, we continue to spend time developing educational resources for companies considering captive formation, such as our captive brochure.

We have also undertaken significant research in windstorm and property analysis and developed a database related primarily to wind events in the Atlantic and southeastern US. This information supports captives in the evaluation of various parametric wind and property deductible buydown products.

Parametric policies are challenging because the structure and trigger may change at each policy expiration, and the underlying risk is difficult to analyse.

Reputational risk, which emerged relatively recently, can be also difficult to analyse because there is wide industry variance on the policy structure, triggers, and payout formulas. Since the risk revolves around company-specific issues that might lead to crises and reputational harm, one must spend a considerable amount of time discussing the details that could surround these events.

Similarly, the directors and officers risk is challenging given the lack of a clear exposure base and rapidly increasing market rates.

SIGMA has been involved in several other non-traditional or emerging risks as well, such as flood, equipment breakdown, bug manifestations, shipbuilding risks, liquidated damages, litigation expenses, crime and theft, wrongful acts, regulatory change, intellectual property, and global shipping security. Each presents its own unique challenges requiring highly specific and creative solutions.

Captive owners may want to exit the traditional marketplace because of increased pricing—but often that pricing is directly related to increased costs and variability related to the risk, making it difficult for an owner to retain and finance.

An actuarial report analysing adverse scenarios may indicate that a captive is not the appropriate insurance programme to protect the company against specific adverse events.

If the metrics (such as total cost of risk) at the adverse level indicate additional funding requirements, and the parent is unable to take on that scenario, then a captive is not a viable choice.

Al Rhodes is president & senior actuary at SIGMA Actuarial Consulting Group. He can be contacted at: al@sigmaactuary.com