Collaboration key to operating a captive: Experts

ORLANDO, Florida — Captives provide a critical source of funds to cover adverse events, such as wildfires, but ongoing education and collaboration with internal and external stakeholders are key to ensuring a captive’s success, experts say.

Melissa Hollingsworth, deputy chief risk officer of the Los Angeles Unified School District, said the district was able to tap into its captive to finance property claims arising from the recent wildfires. She was speaking Friday during a panel discussion at the World Captive Forum, sponsored by Business Insurance.

The district established a single-parent captive, with an initial capitalization of $1 billion, in Vermont last July and had added property to its captive right before the wildfires, using it to finance a $17.5 million deductible, Ms. Hollingsworth said.

The district is the largest landowner in Los Angeles, with total insured values of $30 billion and over 300 locations on its statement of values, she said.

The district had increased its deductible after careful analysis from $2.5 million before the wildfires hit to save costs on its commercial property program, she said.

“We were ready to go, and we have the funds available” to help finance the cleanup from the wildfires and get started with the rebuild, she said.

The school district’s experience highlights the importance of due diligence and carefully evaluating a captive’s expected loss in an adverse scenario, said Anne Marie Towle, Indianapolis-based CEO, global risk management and captive solutions, at Hylant Group Inc.

“If you have a big claim year one, you’re not going to go belly-up. You were prepared,” Ms. Towle said.

“We did our analysis and due diligence before we decided to increase that deductible. We knew we would be well prepared if that pop, that inevitable pop,” occurred, Ms. Hollingsworth said.

Doing an initial feasibility study for a captive is “not a one and done,” said Samantha Poulin, Boston-based associate actuary at Milliman Inc. Captive owners are continually working with their service providers, such as their actuaries, she said, adding, “You’re not rid of us yet.”

Once captives are up and running, actuaries provide expertise in financial analysis and issue regular actuarial opinions to help them maintain their financial health, Ms. Poulin said.

Ms. Towle said that keeping all stakeholders, including the C-suite, “in the loop” is important, “because you are operating that insurance company, you need to make decisions. Granted, it’s not a full-blown traditional insurance company, but approach it in that same manner because you want to give the time and attention to this operation.”