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Global pandemic. Economic volatility. A new “normal” for organizations in every industry. That said, 2020 has been a remarkable year for emerging risks, providing an early lesson regarding the incessant need to enhance resilience. Captive entities, which have long been a reliable tool for financing and mitigating risk, are proving their worth as equally valuable for making organizations more resilient.
The rapid emergence of the COVID 19 pandemic has shown the importance to prepare for interruptions from future risk events. Despite the severity of COVID-19, other risks continue to raise concerns, for instance, cyber risks and energy disruptions. The need for resilience in the face of emerging risks has perhaps never been greater. Captives offer several significant benefits in making their owners more resilient, including: • Pre-loss funding - The ability to finance future losses through a captive offers considerable efficiencies, being a ready source of capital to pay for unexpected losses. Rather than using other funds in hand, or tapping credit facilities, captive owners can utilize assets held by their captive. While organizations have used captives for decades to finance stable, predictable risks, these are potentially more valuable in financing new and unpredictable ones. • Mitigating volatility - As risk-bearing entities, captives relieve pressure on their owners’ balance sheets by insuring exposures to financial volatility. In addition, captives under certain circumstances, with regulatory approval,may serve as a source of cash if their owners’ cash flow becomes constrained. For example, businesses across many industries experienced cash-flow problems when public authorities ordered lockdowns during the coronavirus pandemic. Surplus built-up in a captive can be distributed back to the parent to provide cash-flow relief or be deployed for higher risk assumptions. • Writing broader coverages - Captives provide flexibility in underwriting novel and traditional coverages on broader terms. In addition, captives also enable their owners to optimize access to commercially available coverages. When market conditions change, captives can scale up to assume more risk, evening out the cost of risk transfer. A combination of risk mitigation, risk assumption, and risk transfer often is the most effective way to manage many unpredictable and emerging risks, including cybercrime.Captive entities, which have long been a reliable tool for financing and mitigating risk, are proving their worth as equally valuable for making organizations more resilient.
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