A greater role for Captives? Companies should consider making greater use of their Captives for hard-to-insure, intangible risks

One of the most interesting points to emerge from the recent supply chain seminar (click here for report) was that there may be a much greater role for Captives in managing supply chain risk than most companies have attempted up to now. Furthermore, there are potentially wider risk management benefits to be had from a Captive solution, going well beyond insurance.

This stemmed from a question raised during the session: whether or not it is possible to quantify risk in a supply chain and then transfer it to an insurer. In any class of business you need to be able to measure the exposure before you can get cover on acceptable terms. Given the evolving nature and enormous complexity of supply chains – especially when you go down to the second and third tiers – it is hardly surprising that the exercise is exceptionally challenging.

On the one side we have insurers keen to write BI but demanding to know the size and limits of their potential losses. On the other, buyers who would like to take the plunge but find the exercise overly time-consuming and see uncertain outcomes in terms of claims payment. This is just the sort of scenario made for Captives.

The way it would work is simple, the main thing being to come at it from a business point of view. The company would put funds regularly into the Captive to cover it against losses incurred as a result of disruption to the production line and/or to the provision of services; the policy would pay out in certain prescribed circumstances. Underwriting would be less demanding than you would expect from the conventional market, asking just the questions of its supply chain that the business wants answered. In most cases, it would be a bottom-up approach, building on the reality of what is happening on the ground.

This would provide a much more satisfactory solution than merely keeping the money in a contingency fund – an approach that would likely fall foul of accounting rules and have a number of tax disadvantages. Furthermore the Captive would act as a valuable catalyst and focal point for analysing and, where necessary, mitigating the risk inherent in the supply chain.

One interesting side-effect could be better co-operation between the risk and other departments, based on an alignment of interest. A chief procurement officer who attended our seminar said the issues raised were exactly the same as the ones that he and his colleagues face. This suggests there is room for meaningful conversation between the two departments when discussing supply chain risk – something that Airmic members have often found lacking.

It may be that very few Captives have been used to cover supply chain risk to any significant degree. Airmic would be interested to hear from any that have – please contact georgina.wainwright@airmic.co.uk.