Close-knit is a better fit

The benefits sought by companies following a captive programme are many but primarily they relate to making cost savings and ensuring easier claims handling and management. The bottom line benefits centre round paying less premium than would otherwise be paid to a commercial insurer and having greater claims process control. When adding the potential to insure otherwise difficult risks and make flexible reinsurance arrangements to the mix, it is easy to see why more companies are seeking to either transfer cover to the captive market or expand those captives in their possession already.

The savings and flexibility of claims processes possible in captive arrangements are inextricably linked - the cost is driven by results and key to those is claims' output costs. The success of any captive is therefore to manage that conflict by delivering optimal claim cost output, which allows the business to recover faster and in a way it can control to best suit its needs. An important element of this at the time of a major claim is to work with an experienced loss adjuster that is versed in handling programmes within the captive environment.

Captive arrangements may set up a level of expectation within an insured operating company that the captive will not concern itself with cost but with returning the business to a fully operational condition in the shortest possible time. That is possible, however, because risk management and risk transfer becomes more important as awareness in the corporate governance arena improves. Nevertheless the expectation can remains a concern in the cases of some captives, with many businesses at an operational level being unaware of the real identity the insurer.

Relationship management

From a loss adjusting perspective, working with captives is highly rewarding because it brings the adjuster - which will almost certainly be nominated well in advance on a specific account - deeper into relationships they might otherwise be on the periphery of.

That involvement often extends to an active role in developing processes and best practices with the insured, captive and reinsurer, as well as developing knowledge of operating those companies before losses occur. It also extends to visiting the major risk locations, assisting in developing and testing business continuity plans, establishing claims systems and being briefed on the key business drivers, ethos and requirements of the interested parties.

It should not be forgotten that most claims handled within captive arrangements occur below the deductibles; these will be either ranking or non-ranking as aggregate deductibles for reinsurers. It may be suggested that adjusters are not necessarily cost-effective on some of these claims, however this should be balanced against the risk of claims leakage, which can impinge on captive performance and reinsurers alike. Insured operating companies may undertake repairs expeditiously but if the claim is then simply processed, recoveries can be missed; likewise there may be failures to identify repair costs recoverable from parties such as landlords and their insurers.

It would be simplistic to assume that the role of the adjuster is easier in a captive situation than it is in a traditional insurer-insured relationship: there is the advantage of knowing the business and how it works - as well having established relationships and protocols - but the relationships still need be managed correctly, as do losses.

It is still necessary to determine and investigate the cause to ensure that the loss is covered - or not excluded in the case of all-risks cover - and gather evidence for recovery regarding third-party issues such as neighbouring property damage: beyond that lies managing the loss. The benefit is that there will be established relations and trust among the insured's risk manager, the adjuster and the captive-as-insurer, enabling pragmatic, business-critical decisions to be taken with little delay.

That aside, these relationships can still be stressful. Whenever one party seeks funds from another - even where there is the mutual interest of a captive - there will always be times when disagreements occur. In these situations, the adjuster must maintain impartiality and avoid becoming embroiled in what might become an instance of political infighting between the companies. This is especially so given that behind the captive will be a reinsurer wanting certainty that, when called upon, it is paying what is correct and reasonable in accordance with the captive arrangement.

Generally, dealing with captive claims is similar to its traditional counterpart because the skills are similar. There are, however, the added benefits of being an integral member of the insured and captive team from the outset, which will hopefully mean that there is a long-term working partnership to capitalise on, making delivering the benefits that the captive arrangement was designed for easier.