Analytics for Non-traditional Captive Risks

After attending the Fall 2015 Hawaii Captive Insurance Council meeting and the Spring 2016 CICA captive meeting, I became increasingly aware of the continued trend of placing non-traditional1 risks in captives. At SIGMA, we are seeing a growing number of captives formed with a sole focus on non-traditional risks. We are also noticing a large number of our captive clients, who currently focus on traditional risks, add non-traditional risks to their captive’s portfolio. Recently, I did a high-level review of captives for which I am involved and noted that about 40% have at least one non-traditional risk, and those captives average about four non-traditional risks.

These non-traditional risks often pose unique analytical risk. Many times credible historical data is not available – because data has simply not been captured over time or there are no known events. Furthermore, the annual frequency for a risk may be small, but with potential large severity. Risk transfer, if using only the common 10/10 rule (10% probability of a 10% loss) may also be difficult to support. Because of these variables, analysis of non-traditional risks can be complex, but we are still seeing an increase in companies finding value in placing these risks in a captive.

When considering placing a non-traditional risk into a captive, we offer the following checklist for the analytic support:

  • Collect any internal loss data that has been maintained in relationship to the risk. For example, if the risk is “loss of key customer” then what internal records show the loss history over the last several years? This data – even if very limited – can be very useful in determining appropriate frequency assumptions. If the risk has been previously insured, the loss runs should suffice.
  • Review the risk for appropriate exposure base information. For example, for cyber risk is data maintained regarding the number of electronic transactions? Or for warranty risks is the amount of product sold by year or manufactured by year available?
  • Gather any market quotes that have been obtained for transferring the risk. A market quote for a similar program structure can provide support for additional analytics.
  • Obtain qualitative input from management on the anticipated frequency and severity of the risk. This might be done informally via discussion or by a brief questionnaire.
  • Discuss what appropriate benchmark data might be available to supplement the actual data.

Risks of this nature often require non-traditional analytical approaches, as standard actuarial techniques may not apply. Simulations may be needed based on selected frequency and severity distributions. We suggest that after the checklist has been completed and all relevant data reviewed, that a strategy for each risk be developed. Finally, this strategy should then be discussed in advance with your captive management team, regulators, and auditors to make sure the approach being taken is acceptable.

We welcome your feedback by posting a comment, or contact me at MB@SIGMAactuary.com.

1 For purposes of this discussion, traditional property casualty risks include workers compensation, property, general liability, products liability, medical professional liability, auto liability, and automobile physical damage. Some examples of non-traditional risks include cyber risk, credit risk, product recall risk, equipment breakdown risk, loss of key customer risk, communicable disease risk, and warranty risk.


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Michelle Bradley, ACAS, MAAA, ARM, CERA

About Michelle Bradley, ACAS, MAAA, ARM, CERA

Michelle graduated summa cum laude as valedictorian from Lipscomb University in 1988, receiving a B.S. Degree in Mathematics. She then attended Vanderbilt University and received a M.S. degree in Mathematics. Michelle is an Associate in the Casualty Actuarial Society and is a Member of the American Academy of Actuaries. She also obtained the Associate in Risk Management designation in 1996 and received the award for academic excellence in that program. She served as president for the Casualty Actuaries of the Southeast for the 1999-2000 year. From 1990 to September 2003, she was Vice President and Consulting Actuary for Willis Risk Solutions of Willis North America. During this time she consulted extensively in the areas of actuarial, risk management and enterprise risk management. Michelle received the CERA (Chartered Enterprise Risk Analyst) designation in 2013. She has also served on the board of directors for the Society of Risk Management Consultants. She currently serves on the Advisory Council for Middle Tennessee State University’s Master of Science in Professional Science Program (MSPS). In the area of enterprise risk management, she has focused on modeling issues as regards integrated programs that often include non-traditional risks. She has significant expertise in risk mapping and alternative risk transfer mechanisms. She has been a member of numerous project teams that provided enterprise risk consultancy services and was part of the project team that completed the integrated program that was hailed the “Deal of the Decade” by CFO Magazine (June 2000).

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