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A Look at the New Willis Towers Watson Captive Quantified Model

Data Analytics
October 23, 2018

On August 1, 2018, shortly before the commencement of the Vermont Captive Insurance Association's (VCIA) annual conference, Willis Towers Watson (WTW) announced the release of their new captive modeling effort—"Captive Quantified." Captive.com recently sat down with Sean B. Rider, executive vice president and managing director of WTW's global captive practice, to discuss the evolution of the model and its reception in the captive insurance market.

According to Mr. Rider, the genesis of Captive Quantified was driven by WTW's continuing efforts to enhance its suite of corporate risk-based analytical models. By building Captive Quantified, WTW boosted its already substantial set of quantification models geared toward senior corporate financial and risk management executives. Since captives can play an integral part of a company's overall risk management strategy, the model's introduction allows organizations to assess the potential value proposition of forming their own captive insurer, said Mr. Rider.

This assessment involves a fully stochastic model, which is different from the Microsoft Excel-based deterministic models that are familiar to many captive owners and regulators. The older models typically produce a 5 year pro forma financial projection for a captive feasibility study. The output frequently consists of a best case, expected case, and worst case set of financial statements driven by changing the expected losses in year 2 or 3 of the financial projections. In many instances, the Excel-based models need either to conform to or actually be input into similar models that captive domiciles employ when looking at whether to grant the captive insurer a license to operate. While somewhat useful, most of the output, especially in the out years, bears no relationship to the results the captive insurer ultimately produces.

As the evaluation and assessment of risk have become critical functions for insurance industry senior management, the need to provide actionable outputs in financial terms has increased, Mr. Rider explained. Captive Quantified is 1 of 10 quantitative corporate risk and brokering models that WTW makes available to senior management. All of these tools are Web-based, making them accessible 24/7 on any Internet-connected device, said Mr. Rider. 

Captive Quantified allows management and boards to create and perform the following.

  • Detailed interactive value assessment of the captive proposition from both the captive insurer and the parent company's perspectives
  • A detailed pro forma analysis of the organization's financials before and after forming a captive insurance company
  • Live and interactive stress testing allowing for the change of any assumption and testing of any scenario in seconds to evaluate capital adequacy, explore captive expansion, and more
  • A domicile scorecard module to identify the best captive domicile for an organization's unique needs

We were especially intrigued by the third bullet point, the ability to change any assumption on the fly, because of our knowledge of early dynamic financial analysis (DFA) models. The problem many users of the early DFA models struggled with was determining the sensitivity of the model to changes in assumptions and knowing which were the key assumptions users should be focused on. We asked Mr. Rider about this issue. He responded that WTW is working on an updated release of the Captive Quantified model that will isolate and provide guidance around the key risk optimization variables for the users. 

Captive Quantified is designed to be used by entities of all sizes looking to understand the utility of forming a captive insurance company. The model incorporates elections for both 831(b) and 953(d) captives. It seeks to answer the value proposition of forming a captive insurance company versus purchasing traditional insurance and/or retaining the risk with no coverage and using capital to pay for any losses. The model also allows users to compare various domicile options based on the profile of the corporation and the risks being contemplated for coverage.

Rider, SeanSpeaking of captive domiciles, we asked Mr. Rider how the model has been received by captive regulators. He indicated the reception has been very positive, especially the ability to look at the range of loss distributions based on the assumptions the company provides.

Readers seeking further information on the Captive Quantified model or looking for an actual demonstration are asked to contact Sean B. Rider, Willis Towers Watson, global captive practice. Photo of Mr. Rider at right is courtesy of Willis Towers Watson.

Copyright © 2018, International Risk Management Institute, Inc.

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