Background and risk management issues

A Malaysian manufacturer, with manufacturing entities located in Indonesia, Vietnam and Thailand has in place a quasi-global property policy in place, with large policy deductibles with the intention of lowering the overall cost of premiums. The policy is managed by an insurance broker with operating presence in these countries for the purpose of ensuring that the claims and insurance services are managed adequately. To a certain extent, the group grants autonomy to its business units and each entity felt that a large deductible greatly exposes the group financially to catastrophic losses. Each manufacturing entity was free to arrange additional insurance coverage, depending on local regulatory and or business needs. With this, the management’s performance review was also based on local entity’s profitability.

A stress test showed that a single catastrophic loss can potentially render some of the small entities insolvent without the parent investing more capital in the absence of adequate insurance.

Alternatives considered and implemented solution

The group could have decided to purchase the insurance in the local market for each entity. However, this would have been very expensive and would not have provided sufficient flexibility to manage and centralise retentions, pricing, risk engineering and claims management.

Historically, the group has already in place excellent risk governance and management in place, as the maximum single loss incurred in the last 10 years was RM3mil. Decision was made by the board of directors, based on the recommendations of the risk management to take control of their own insurance programme by setting up a captive to facilitate this. Third party actuarial services were engage to perform a review of their risk bearing capacity and it was recommended that the group could comfortably retain up to RM4mil each and every loss and in the annual aggregate, which would be retained within the captive. Local deductibles for group entities ranged from RM50 000 to RM200 000 each and every loss, depending on financial strength and claims experience. Additionally, catastrophic loss exposure above RM4mil could be reinsured to third party ‘A’ rated reinsurance companies.

This arrangement provided the opportunity to pool the risk of the individual subsidiaries and regions, many of which had varying needs in terms of retention and limits. The group has oversight of the overall group risk and determines the policy for the whole group. Third-party professional captive manager in the captive jurisdiction was engaged to prepare underwriting information and undertake the premium billing and collection to/from the insured subsidiaries, as well as general accounting, management and regulatory reporting, and compliance activities. All insurance and operational risks are directed and monitored by the risk management function of the captive, which reports to the Board of Directors.

Outcome and key benefits

The captive enabled the group to avoid buying excessive insurance in the market while providing additional deductible buy-down insurance to the smaller entities to ensure they were financially protected to a level that they could tolerate. The captive arrangement also allowed risk management to gather central loss information and then to tailor subsidiary specific risk prevention initiatives to improve the loss experience

Background and risk management issues

A Malaysian manufacturer, with manufacturing entities located in Indonesia, Vietnam and Thailand has in place a quasi-global property policy in place, with large policy deductibles with the intention of lowering the overall cost of premiums. The policy is managed by an insurance broker with operating presence in these countries for the purpose of ensuring that the claims and insurance services are managed adequately. To a certain extent, the group grants autonomy to its business units and each entity felt that a large deductible greatly exposes the group financially to catastrophic losses. Each manufacturing entity was free to arrange additional insurance coverage, depending on local regulatory and or business needs. With this, the management’s performance review was also based on local entity’s profitability.

A stress test showed that a single catastrophic loss can potentially render some of the small entities insolvent without the parent investing more capital in the absence of adequate insurance.

Alternatives considered and implemented solution

The group could have decided to purchase the insurance in the local market for each entity. However, this would have been very expensive and would not have provided sufficient flexibility to manage and centralise retentions, pricing, risk engineering and claims management.

Historically, the group has already in place excellent risk governance and management in place, as the maximum single loss incurred in the last 10 years was RM3mil. Decision was made by the board of directors, based on the recommendations of the risk management to take control of their own insurance programme by setting up a captive to facilitate this. Third party actuarial services were engage to perform a review of their risk bearing capacity and it was recommended that the group could comfortably retain up to RM4mil each and every loss and in the annual aggregate, which would be retained within the captive. Local deductibles for group entities ranged from RM50 000 to RM200 000 each and every loss, depending on financial strength and claims experience. Additionally, catastrophic loss exposure above RM4mil could be reinsured to third party ‘A’ rated reinsurance companies.

This arrangement provided the opportunity to pool the risk of the individual subsidiaries and regions, many of which had varying needs in terms of retention and limits. The group has oversight of the overall group risk and determines the policy for the whole group. Third-party professional captive manager in the captive jurisdiction was engaged to prepare underwriting information and undertake the premium billing and collection to/from the insured subsidiaries, as well as general accounting, management and regulatory reporting, and compliance activities. All insurance and operational risks are directed and monitored by the risk management function of the captive, which reports to the Board of Directors.