Technology has an increasingly important part to play in the management of captive insurers. Richard Latham outlines the principles behind the systems.

In order to assess the technology needs of a captive insurer, it is first necessary to define what a captive insurance company really is. In its simplest form, a captive is a wholly owned subsidiary company of a large corporation established to underwrite some of the organisation's risks, including risks originating from companies within the group.

In that sense, using a captive can be viewed as a form of self-insurance, though legally this is not the case; a captive is a properly established insurance company, with its own articles of association and its own board of directors. It also has regulatory obligations, which will vary according to the domicile in which it is established. In addition to writing business from companies within the same group, some captives expand to write third party business.

Captive insurance companies have been a feature of the business landscape for over 30 years. According to some recent reports, they and allied ‘alternative risk transfer' (a euphemism for any non-conventional insurance) vehicles account for one third of all the property and casualty business written worldwide. Captives have grown rapidly in recent years, and the choice of domiciles for their incorporation has mushroomed, not least onshore. However, software companies have often ignored this market, arguably to their detriment.

Like any other re/insurance company, a captive will have basic system requirements:

  • underwriting – risks, premiums and claims;
  • reinsurance, inwards and outwards;
  • enquiries and reports;
  • accounting; and
  • risk management, loss control and communication.

    Software and advanced future-proof technology can help in each of these areas.

    It is important to understand that each captive is different. Consequently, a captive manager needs to employ a software system capable of handling the range of captives under management. In addition, a captive manager might run a rent-a-captive facility or a cell programme, both of which bring separate challenges. This means software systems need to be flexible enough to cope with this degree of variety, as well as capable of dealing with any other alternative risk transfer vehicle that might come along in the future.

    Naturally, risks need to be entered and integrated with claims and accounts, and in some cases there may be a requirement to monitor and record quotes.

    Premiums need to be recorded, as do mid-term policy changes, and renewals need to be invited. Document format and management are vitally important. Premiums also need to be defined by earned and unearned where financial years differ from underwriting years, and details of Letters of Credit must be recorded.

    Some claims flow individually, others via bordereaux. Automatic importation of information via an extended markup language (XML) or similar format can be helpful. Claims need to be recorded, both paid and outstanding, by underwriting and by financial year.

    The system needs to record movements in reserves and IBNRs, and produce triangulation reports. Finally, for UK-owned captives, since the UK Government's Budget in 2000 there is a statutory definition of a claim reserve which may vary from the actual, and both of these must be recorded.

    Because of local regulatory requirements in numerous territories, a captive frequently acts as a reinsurer to a locally admitted carrier, which fronts the risk by writing the initial insurance business of the organisation and ceding it to the captive. Therefore, captives often act as reinsurers as well as insurers and so need to be able to handle inwards reinsurance.

    Captives must meet increasingly strict regulatory capital and solvency requirements, but, compared to conventional insurers and reinsurers, they often lack net capacity.

    Outwards reinsurance is often vital, and the system must be able to record the different methods of placement and link them to the risks. Triggers are needed to flag attachment points and aggregate limits, as well as alerting profit commissions and premium payment warranties.

    Enquiries and reports
    Modern systems are able to enquire and report at all levels and at high speed, and consequently management increasingly expects instantaneous information. There is no doubt that quick and accurate information helps sound decision-making and hence contributes to a successful business. But at the same time, this means that the ability to enquire and report at short notice is vitally important.

    Any information contained within the system should be available for reports. The reporting package should be sophisticated enough to sort and to determine the relative importance of information. It ought also to ‘drill down' to individual transactions, policies and claims. Finally, the ability to export this information into familiar spreadsheet software such as Excel allows the user to produce graphs and tables for management.

    As previously mentioned, a captive reports to its parent and separately to its board of directors, the latter of which is often made up of a majority of local experts. Information is as important to these two constituencies as it is to the management of any insurer – sometimes even more so.

    In addition, as part of their regulatory systems all domiciles demand regular returns. These vary in content and frequency but the principle remains the same, and the ability to set up reports which can be produced quickly and at short notice remains enormously important. Examples of what is required from these returns include:

  • premium split by classes of business categories;
  • schedule of maximum retentions net of reinsurance per policy per year, showing policy limits and estimated maximum losses;
  • summary of reinsurance business ceded outwards by class and by method of placement, including the threshold, any one loss and in the aggregate, showing the basis of premium and commission received, and specifying any reinsurers writing over a certain pre-defined amount;
  • claims analysis, reported, paid, outstanding and IBNR (incurred but not reported) by class of business and by year of origin, showing expected trends. Claims over a percentage of net assets will often need to be showed individually;
  • details of any letters of credit or guarantees showing the beneficiary, who issued it and how much;
  • material changes projected beyond financial year ends, focusing on policy limits and retentions, and reinsurance programmes;
  • solvency margin calculations. This often made up of the minimum capital requirement, say $100,000, plus, for example, 10% of net premium up to $3m, and 5% of net premium above $3m.

    It all adds up to quite a challenge for any captive software system

    Accounting systems for captives need to record all insurance and reinsurance transactions and integrate with the risk, claims and reinsurance functions. Relational databases are a fundamental requirement, though it is not necessary for the system to have a general ledger function provided it can export to spreadsheet software or integrate with a chosen general ledger package.

    The system will need to be multicurrency, euro compliant (recording conversions to six significant figures), and be able to monitor numerous bank accounts. Solvency margin calculations are important, and, ideally, the system will need to track investment income.

    As the financial results of the captive will form part of its owner's performance, it makes sense to accompany underwriting with a sound risk management and loss control programme.

    The system therefore needs to be compatible with those providing information to it such as fronting companies, brokers, loss adjusters, consultants and claims handlers.

    It needs to import all manner of soft information such as attachments, video clips and documents. Scanning is essential, and integration with map software to measure accumulation, though not essential, is very useful.

    In this ever more technical age, information can also be imported – and exported – electronically via e-mail, through the web, and by using XML. This may seem ambitious to some captive owners and managers, but use of this technology is extraordinarily powerful, and will give an edge over competition.

    Whatever the requirements for a captive system, the overriding principles will remain the same; the system must have a core capability to record risks, claims, reinsurance and accounting transactions, and all these, through a relational database, must link seamlessly to each other. The system must also be able to:

  • gather data – soft or electronic – and import it easily into the system;
  • enquire, analyse and report on that data sufficiently to meet all requirements;
  • react to and change information in real time;
  • monitor and control the captive's performance; and
  • deliver high quality documentation and presentation material quickly and easily.

    All this technology is now available in the market, and there is little doubt it will bring measurable business benefits to the captive insurance industry.