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ABOUT THE REPORT In July-August 2014, Bloomberg Audience Insights completed an online survey examining risk interconnectivity from the perspective of global corporates, looking specifically at the use and benefits of captives as a potential value-added solution. The survey s respondents were 80 (VP or higher) and 75 Risk Managers (VP or higher) in North America (U.S. and Canada), Europe (France, Germany, Spain, Switzerland and the UK), Asia (Australia, Hong Kong, Japan and Singapore) and South America (Brazil and Mexico). All respondents were from companies with 500 or more employees. Prepared by Bloomberg Audience Insights 2
THE GROWING CHALLENGES OF GLOBALLY INTERCONNECTED RISK The survey makes plain that there is broad awareness of the mounting challenges presented by global risk interconnectivity. Fully 89 percent of senior business decision-makers and 91 percent of risk managers agree that the next few years will see the global risk landscape become even more closely interconnected. (Here as elsewhere in the results, risk managers tend to have slightly stronger feelings.) Understanding the issues, they also concur, isn t the same as being fully prepared for them: 89 percent of SBDMs and risk managers alike feel that global corporations need to improve their risk resilience to be certain they will remain in operation. There is less of a consensus over the barriers to managing interconnected risks effectively. In general, risk managers see more hurdles, including external issues such as working across global markets (which they are 10 percentage points more likely than SBDMs to see as a challenge, at 79 percent to 69 percent) and legal regulations in the countries in which they operate (81 percent to 59 percent.) TO WHAT EXTENT DO YOU AGREE THAT CORPO- RATIONS NEED TO IMPROVE RISK RESILIENCE TO ENSURE THAT THEY STAY IN BUSINESS? Percent of SBDMs and responding 3% 8% 41% 48% 3% 8% 33% 89% 89% 56% Risk managers also see more formidable obstacles than SBDMs in regard to resource constraints, as well as internal attitudes and processes. Regarding resource constraints, risk managers perceive a greater lack of internal expertise (81 percent to 65 percent) and budget (81 percent to 64 percent); regarding internal attitudes and processes, they see insufficient recognition of interconnected risk as an issue (81 percent to 65 percent), as well as corporate governance (79 percent to 58 percent) and lack of scenario planning (80 percent to 68 percent). It takes time and a couple of steps back to have that helicopter view of complete risk interconnectivity, says Ian Veitch, Global Head of Proposition & Underwriting, Zurich Insurance Group. Strongly disagree Somewhat disagree Neither agree nor disagree Somewhat agree Strongly agree Chief risk officers look over the totality of risk and see the interconnectedness. Twenty years ago, that role was just about buying a bit of insurance. As the world has become more complicated, the CRO is ahead of the pack regarding how it all hangs together. Ian Veitch, Global Head of Proposition & Underwriting, Zurich Insurance Group Prepared by Bloomberg Audience Insights 3
IMPROVING THE INTEGRATION OF HOLISTIC RISK MANAGEMENT ACROSS DEPARTMENTS Integrating risk functions across an enterprise is a persistent challenge that is part turf conflict and part lack of awareness. The integration of the risk function and human resources (HR) is a good example: Only 31 percent of SBDMs and 43 percent of are willing to say their corporation is very effective at managing risks related to human capital. HOW EFFECTIVE IS YOUR CORPORATION AT MAN- AGING RISKS CONNECTED TO HUMAN CAPITAL? THIS INCLUDES RISKS RELATING TO EMPLOYEES OR CAUSED BY EMPLOYEES. Percent of SBDMs and responding The issue isn t merely an issue of degrees, but also type. HR in particular is one of the functions least likely to be considered integrated with the risk function. Nineteen percent of risk managers and 28 percent of SBDMs say they believe that the HR function is not integrated. SBDMs are nearly as pessimistic about sales and marketing functions, with 26 percent viewing them as not integrated, although risk managers view these areas as somewhat less troublesome (12 and 13 percent, respectively, in line with the operations and legal functions). 1% 19% 49% 69% 0% 8% 49% 57% As we move from an industrial economy toward a service economy, people HR s purview are becoming one of the biggest assets of any complex corporation. There is a parallel increase in the risks associated with people. But, says Paolo Marini, Global Head, Customer Management, Corporate Life & Pensions, Zurich Insurance Group, this is very often stated at the level of a company s vision and not often translated into reality. People risks are just as important as buildings or balance sheet risks, so a lack of awareness regarding the risks associated with them shouldn t be overlooked. For a global business, a captive an insurance company owned by the parent company that insures or reinsures the risk of the parent and its affiliated companies is one of the most powerful tools that can be used to help effectively and efficiently integrate risk function across the enterprise. We re seeing risk managers and employee benefits managers work together to put employee benefits into a captive to better allow holistic risk management, says Wendy Liu, Global Partnership Director, Corporate Life and Pensions, Zurich Insurance Group. 31% Not at all effective Not very effective Somewhat effective Very effective 43% We re seeing risk managers taking more of a lead in talking to people across the organization, even if that s not their normal remit. Wendy Liu, Global Partnership Director, Corporate Life and Pensions, Zurich Insurance Group Prepared by Bloomberg Audience Insights 4
THE ROLE OF CAPTIVES Risk managers and SBDMs alike who employ captives emphasized their utility in terms of risk management and cost effectiveness, as well as their analytical benefits. By using a captive, the capital remains in the business and the risks are easier to assess after a crash, says one SBDM in the survey, while another points to the relative low cost plus flexibility and scalability of captives. One risk manager says that he eyes captives to safeguard in case of accidents, so adverse impact would be lower. On the other side of the ledger, non-users of captives cited a lack of need, fit and awareness as underpinning their reasoning. We are too small, says one SBDM, while another admits there is still a definite lack of awareness about this. POTENTIAL BENEFITS OF CAPTIVES: MORE EFFECTIVE MANAGEMENT OF PROPERTY, CASUALTY AND HUMAN CAPITAL EXPOSURES Percent of SBDMs and who agree 34% 40% However, using a captive provides financial as well as risk management benefits. You should look at captives from a cost and control perspective, says Liu. From the control perspective, for example, adding employee benefits into your captive gives the company the control it needs to really implement a global benefits program. It gives the ability to design and manage employee benefits, using a captive, from a more global, holistic point of view. From a cost perspective, adding employee benefits allows companies to reduce or eliminate some of the frictional costs, and employee benefits offer diversification to some of the other risks in the captive. That allows for the potential for capital savings and the more efficient use of capital. By using a captive, the capital remains in the business and the risks are easier to assess after a crash, says one Decision- Maker in the survey. Another SBDM points to the relatively low cost, plus flexibility and scalability of using a captive. Prepared by Bloomberg Audience Insights 5
USING CAPTIVES TO IMPROVE RESILIENCE FOR RISKS RELATED TO HR Employee benefits comprise an estimated 30 percent of total employee compensation for most corporations. For this reason, combining benefit policies can help ensure more efficient use of premium dollars. WOULD YOU CONSIDER INTEGRATING EMPLOYEE BENEFITS PROGRAMS AND LIFE INTO A CAPTIVE? Percent of SBDMs and responding Yes Taking a very serious approach to benefits and the overall treatment of employees means that not only will a company be able to attract, retain and motivate talent, but also their reputation in the market will stand out and make them a more attractive place to work, says Marini. Among risk managers and SBDMs who do not currently integrate life and global employee benefits programs into a captive, 36 percent of risk managers say they would consider it, along with 28 percent of SBDMs. Whether enabling more effective management of a corporation s assets (51 percent vs. 36 percent), lowering financial exposure to risks relating to human capital (48 percent vs. 30 percent), or increasing program cost effectiveness, risk managers see greater upside than their SBDM counterparts, 10 percent of whom see no benefits at all (vs. just 1 percent of risk managers). Combining benefits requires breaking down organizational silos. There is a risk of losing control on some decisions, says Marini, and that can scare people in the HR, compensation and benefits parts of a company. But they might not necessarily be good at negotiating risks, rates or prices, which might be best left to the risk managers. At forward-looking companies, risk management and HR management have begun to talk and realize that they have some interests in common better financing and better understanding of risks, for starters. 28% 36% A captive allows the HR function to better manage talent risk, says Veitch. It frees up cash and it frees up time to allow HR to focus on the other key parts of employee benefits. HR can focus on what the pay structures are, what motivates you, and the financial management of the risk passes to somewhere else. It allows HR to focus on employees. A challenge for every company is to find the most efficient way to manage their employee benefit risks. With a captive, this tends to be done in the background, and employees don t even experience it. Ian Veitch, Global Head of Proposition & Underwriting, Zurich Insurance Group / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Prepared by Bloomberg Audience Insights 6
A DESIRE TO KNOW MORE ABOUT CAPTIVES Risk managers and SBDMs alike express strong interest in learning more about managing interconnected risk, and there is a healthy appetite for greater knowledge about captives in particular. This is especially true for risk managers, 95 percent of whom expressed curiosity about captives including 60 percent who are very interested with nearly three-quarters (74 percent) of SBDMs also interested, split almost equally between very and somewhat interested. HOW INTERESTED ARE YOU IN LEARNING MORE ABOUT CAPTIVES? Percent of SBDMs and responding 11% 1% 4% Both sets of respondents indicate approximately the same level of interest in being kept up-to-date on the latest ways in which captives are being used for risk management. At present, less than a third of risk managers have heard about captives from their brokers; insurance companies are the leading source of such information, at 53 percent, followed by the Internet/social media and industry events (44 percent), colleagues (37 percent) and forums (32 percent). Twelve percent of risk managers note that they had not received any information about captives. 15% 35% 39% 74% 35% 60% 95% The use of captives to effectively manage property, casualty and human capital exposures is becoming a top risk management strategy for many organizations. From large multinational corporations to smaller domestic entities, captives can provide a win-win for risk managers and benefits managers. It s not about reducing benefits, which is a hurdle that risk managers need to clear to implement the program, says Liu. It s a win-win, because it allows HR managers to use the captive to better design a program that they think will be more effective and efficient. Not at all interested Not very interested Somewhat interested Very interested To learn more about how you can make your business more resilient to globally interconnected risks, and to learn more about captives, visit: http://www.zurich.com/captives / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Prepared by Bloomberg Audience Insights 7