Captives should plan for ‘black swan’ events

Captives would be wise to plan for ‘black swan’ events, William Montanez, director of risk management for Ace Hardware Corporation, said during his presentation at the Captives & Corporate Insurance Strategies Summit in Toronto on May 16.

These worst-case scenarios are characterized as high-impact, rare and unpredictable events.

To ensure viable and sustainable captive growth, Montanez said, there is a need to quantify asset, credit, reserve and underwriting risks; determine the overall health of the captive; and develop a roadmap to strategically grow the captive.

At Ace Hardware, it initially appeared the captive had $24 million in capital surplus. “We asked the experts what would happen if everything went south on us on the claims side?” Montanez said.

Based on the answer, Ace Hardware adjusted its total to about $12 million. And then, once an actuary considered other risks as part of the captive’s dynamic risk modeling — underwriting risk, reserve variability, interest rate, credit risk and equity investment volatility — the number fell to about $10 million.

Going through the process provides numbers, but it also allows the captive to determine excess capital available “to grow the business,” Montanez said. With this number, the captive can explore options such as underwriting coastal coverage, providing a rate decrease or underwriting umbrella coverage for retailers.