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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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Steve McElhiney—Captive Insurance Person of Interest

Steven McElhiney
June 05, 2017

As part of our continuing Person-of-Interest series of profiles on captive insurance industry leaders, recently sat down with Steven McElhiney, CEO of EWI Reinsurance, to talk about his career, captives, risk management, and China. Mr. McElhiney shares his thoughts about trends and challenges shaping both the captive and reinsurance markets today.

You've had an interesting career. Please tell us about it.

For the past 13 years, I have been the CEO of EWI Re, as well as the chief risk officer of its parent, NL Industries. I am also the president of our Vermont captive, Tall Pines Insurance Company.

I have 30 years of insurance experience, including 10 years at Allianz/Fireman's Fund in a variety of management roles, followed by time with TIG Insurance as senior vice president of the Reinsurance Division, and with a top 20 reinsurer, Overseas Partners US Re, as chief financial officer (CFO), and Argo Group as corporate treasurer. I have been the president of two industry associations (the CPCU Society and Vermont Captive Insurance Association (VCIA)) and active in a variety of other boards.

My career vertical is insurance corporate finance that has morphed into a variety of reinsurance and operational and underwriting roles.  

From a reinsurance perspective, I have been involved in all three sides of "the reinsurance triangle": the primary ceded function, the assuming reinsurer, and the reinsurance intermediary.   

Which is the toughest? 

The intermediary side by far due to the factors beyond your control, the long-term sales cycle, and the reinsurance pricing cycle. Success requires nimbleness, collaboration, influence management, and anticipating changes. I love it.

How did you come to specialize in reinsurance and particularly the captive industry?

I have an MBA in finance, and my initial career was well steeped into the core disciplines of accounting, audit, and eventually a deep level of experience in corporate finance and treasury.

A confluence of events led to me ending up in reinsurance. My company at that time, Fireman's Fund, was deeply involved as a creditor in a growing number of reinsurance failures in the United States, London, Brazil, and elsewhere with millions in exposure. I was put into a newly created role to better coordinate the counterparty credit risks and to develop more proactive processes around commutations/novations as well as to implement reinsurance credit risk rating models—one of which earned me a prestigious Allianz Chairman's Award.   

Through the establishment of reinsurance credit committees and reinsurance security committees, I became much more exposed to underwriting units and divisions within the group. As a result, I was becoming much more involved in liaisons with insurance operational groups, which led me to pursue a Chartered Property Casualty Underwriter (CPCU) credential. I found an almost immediate positive impact on my career as I was able to much more effectively work with career underwriters, and this, ultimately, led to a series of promotions in the operational side and the reinsurance division of Fireman's Fund. It was a pivotal decision in my career and is why I'm now so supportive of the CPCU Society.  

My involvement in security and catastrophe (CAT) management led to deep involvement with Allianz Group in Germany and other affiliate companies. At that point, I was deeply involved in the reinsurance process within the global organization and that led to other opportunities with other organizations in expanded roles. I like to consider myself as one of the few people who have a deep understanding of both finance and underwriting, and this has positioned me for the confluence of reinsurance solutions that are capital markets-based and that are so prevalent currently. It has also served me quite well with my career interactions with the various rating agencies and various departments of insurance. I speak their language.

What was your most important job as respects your career path, and why?

I consider all to be part of a general career mosaic. I am different from most boomers in that I did not pursue a strictly linear path (in my case, in the finance vertical). My career moved between finance and operations and reinsurance (both ceded and assumed) in a very unconventional manner. As a result, I tend to often have unique insights into risks, trends, and developments as I see the multifaceted implications involved. As a result, we have been able to craft some "first of their kind" solutions for our clients and I naturally gravitate to the more financially oriented products. I am most natural when I'm speaking to a client with a financial background and can help CFOs better decipher risks and the attendant solutions.

The two jobs that have been most important to my career have been Fireman's Fund and Overseas Partners Re. Fireman's was an example of a "best practices" organization where all insurance processes were efficient and optimal. Many of the people I worked with went on to become CEOs at some of the largest insurance groups in the world. That company was also very supportive of insurance education, and I earned three designations and the CPCU while there and also was a teacher of insurance courses over a 5-year period. Overseas Partners US Re (or OPUS Re) was my first opportunity to be a CFO and a board member of a large multibillion-dollar organization. I was involved in all aspects of the formation of the company, the company's successful operational and financial maturation, and its eventual successful sale to White Mountains Group.  

That said, each job has had a critical impact on my career. TIG was a company in transition, and I feel one learns the most in company situations that are in a state of turnaround. I became a much better manager in that role where I managed the largest staff of my career (nearly 100).  

My current role at EWI has allowed me to really craft the chief risk officer aspect of my skill sets coupled with a broker's mind-set. Working for an industrial organization has been a very refreshing experience compared to the financial services industry given its stability and the complexity of the risk issues involved, and this role has also allowed me to run and reposition a captive into a much better state than when I joined.   

I like to say, a career is not a destination, but rather it is a journey. Enjoy the journey (or you're on the wrong path, and embark on another journey).

What do you consider to be some of the most significant industry trends in reinsurance and captives, and why?

Using a baseball metaphor, I like to say that captives are in the third inning at this juncture. It is still early days; while the Fortune 500 is well penetrated—over 70 percent have captives—the broader Russell 2000 and the world of private companies are just starting to be penetrated. There is an enormous opportunity for the captive industry to go "down market" over time for deeper penetration. The concepts of risk retention have broad appeal to a variety of organizations and increasingly the captive message transcends market cycles.  

Further, the international aspect of captives is just emerging in Asia, Latin America, and other regions. While the European Union has deep captive penetrations, the broader universe is just starting to turn to this risk tool.

I am a strong proponent of using a captive as a reinsurance placement vehicle. Assuming the same loss costs, reinsurers have a lower operating expense model and, more importantly, a broader risk appetite than do primary companies. In my organization, we utilize manuscript coverage forms that allow us to add back certain coverage features that might be limited or nonexistent in a primary fully insured solution. This has had incalculable value to my organization over time.

I feel the future developments utilizing reinsurance are two-fold. First is the opportunity to tailor captive owner solutions that may not be cleanly insurable presently (like tailored contingent business interruption coverage or a more expansive cyber insurance solution as to triggers, limits, etc.). Second is the opportunity for a capital markets-based syndication model for a captive for current risks that may not be insured. For example, the so-called Cyber Hurricane represents a systemic event that would bring down a global Internet-based service provider or retailer. Thus, by using a captive, the company could create a binary-type trigger that would respond if certain predefined damage parameters were reached. The credit counter-parties could be global hedge funds.  These are just a few examples.

What do you consider to be the most important challenge facing the captive industry, and what should the industry do to meet that challenge?

Honestly, I do not see a lot of existential threats to the captive industry. The future is unusually bright in this space, compared to many other industries as well as other aspects of the insurance industry. The traditional property-casualty industry in the United States does face some existential threats in the form of future dramatic declines in auto sales, driverless vehicles, additional insured (AI), and other factors involved in how insurance is sold, distributed, and priced through Fintech solutions and a quickly evolving competitive landscape. Great changes are coming quickly in that space while the reinsurance industry is facing further consolidation and increasing competitive pressures from capital market providers.  

The insurance world does to some extent follow the theory of the "lowest common denominator" in which the actions by certain competitors can impact the entire universe. I'm a big supporter of micro-captives; however, there has been some abuse. This must be contained to prevent any broader "tainting" of the 99 percent of the captive industry "good actors." Frankly, some domiciles are more engaged and effective than others. The bar must be continually raised for best practices for all domiciles on a global basis.

Increasingly, the captive community that I deal with is not involved with a captive for tax reasons. Thus, potential tax law changes do not have much of an impact on the captive industry, in my view.  

You and your company have become active in China. How does the captive industry in China mirror and differ from the United States?

In most ways, the captive industry in China is nascent, beyond a handful of captives established by some of the state-owned enterprises. The industrialization and evolution of China augur incredibly well for the future given the financial and risk complexity of the global companies emerging in China and a high degree of appetite to retain risk. I see China as the single-greatest opportunity area for the global captive industry over the next few decades. Similarly, South Korea has enormous potential for captive penetration. We plan to be part of that growth. [ note: see the article by Mr. McElhiney's colleague, "China Captives in the Limelight."]

What advice would you offer to someone new to risk management or insurance on how to have a successful career?

First, I am a strong proponent of formal insurance education and training to provide a foundation for success. I am a big proponent of the CPCU program in this context.

Second, I strongly urge all to be "lifelong" learners in both their career vertical as well as a wide swath of other disciplines. Risk is holistic and evolving, and today's risk manager requires a deep skill set to respond to a variety of evolving and emerging threats.

Third, seek a variety of experiences and avoid the temptation to become overly specialized too early in your career. It makes changes in the future all the more difficult.  If you are not learning and growing in your current role, seek a new one. Take ownership and control of your career. 

How do you stay up to date with ongoing developments in your field?

I read three newspapers a day and read a wide variety of materials around climate change, AI, and geopolitical threats in this context on a daily basis. I find one of the best ways to be up to date is through one's network. I am a serial networker with more than 3,000 LinkedIn connections, for example, and enjoy the opportunity to be out and about in the industry. We often learn about emerging trends and concerns through meetings on an international scale, as much is not published in the trade press. Social media is an enormous tool in exchanging risk thoughts—I do so with dozens of people frequently (including some very well known parties). The pace of change is increasing, and the challenge to keep abreast and also relevant in the space requires continual effort and a conscious effort to learn and to embrace change.  

Are you optimistic or pessimistic about the near future, and why?

I am an eternal optimist. We live in an amazing time with technological advancements that were unimaginable just several decades ago. Further advancements that are in store for medical technology, driverless vehicles, and technology generally are simply breathtaking. That said, the potential to industrialize the world fully are almost nascent.  For example, half the continent of Africa does not have electrical power at this point. That is being rectified largely through alternative energy sources—solar energy has enormous potential in this context in Africa. Just think of the positive global economic impact that will occur from the technical evolution of the African continent alone. In 2050, one of four of the world's inhabitants will reside in Africa. They will be consumers of all products, including insurance. Unfortunately, most of the advanced world still views this region with a 1970s prism. Insurers from Asia and the Middle East are very active in pursuing these markets with the United States being notably absent.

I'm very active with the issue of climate change and the various insurance and reinsurance implications and served on a White House council in this regard. I'm optimistic about humanity's ability to meet the climate challenge through emerging technologies and the sheer profit potential that will arise for those companies offering new solutions. The "Bill Gates" of 2030 will probably be the architect of a climate-based technology company and will probably reside in China or India. It has never been the tendency in the history of humanity to go blindly off a cliff. The adverse climate curve trends will bend quickly given the technical solutions that are under development (like hydrogen vehicles, for example). 

The changing risk profile of terrorism gives me considerable concern. It seems to be evolving and metastasizing into forms that are both highly difficult to predict or anticipate.   

Any closing thoughts or comments?

My closing comment is addressed to those at the beginning of their risk career or who are contemplating one. You are in an unusually robust situation now where demographic changes and a growing demand and need will create unprecedented opportunities. Embrace them, and continue to learn as much as you can in the years to come. I truly envy the 25-year-old just starting out in such a career—to use a Warren Buffett analogy, they are like the person crossing the plains to the West in the late 1800s—more opportunities than can be taken advantage of.

Photo of Steven McElhiney, above, is courtesy of EWI Re, Inc.

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