Data is key for captive formations

Insights / Data is key for captive formations

By Asad Khalil FIA, Managing Director, Perrenial

A summary of Asad Khalil's article for Captive Review. Read the full article on Captive Review.

When a corporate considers setting up a captive, the actuary works with the captive manager and the group insurance or risk manager to understand the proposed captive's risk appetite. They then use historical claims to propose (re)insurance programme structures that minimise the captive's Total Cost of Risk (TCoR). The quality of that feasibility study depends heavily on the data provided.

The article sets out four core data requirements:

• Individual claims data (dates, amounts paid, outstanding and incurred, deductibles), so that severity and frequency distributions can be fitted. Aggregated loss summaries limit the techniques available and can lead to a less accurate loss model.
• Triangulations of incurred claims and claim numbers, to project claims to ultimate with allowance for IBNR. Without them, benchmark development patterns can push the projected captive premium too high or too low.
• Exposure data, such as wage roll or headcount, to trend historical claims to today's risk.
• Current (re)insurance programme and premiums, so that current and alternative structures can be compared.

As the article concludes, the rewards of a captive are great, and so are the risks. Accurate, granular data is essential.

First published in Captive Review, September 2020.

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