Temple University
Michael Zuckerman, professor and academic director for enterprise risk management at Temple University, discusses educating his students on captive insurance and breaks down his new teaching approach
What does the captive insurance course at Temple University involve? How is it unique?
The risk management and actuarial science majors in our programme have an opportunity to take a course called ‘Risk Financing’, usually in their junior or senior year, and this course introduces them to captives.
The students that are interested in the property and casualty industry have to take a capstone course known as ‘Managing Risk Across the Enterprise’. The capstone as it is evolving will focus 50 percent on an overview of enterprise risk management (ERM) and 50 percent on risk financing at a strategic level, primarily the use of a captive insurance company.
This new pedagogical approach will examine captives as a strategic risk management tool and connect this risk financing tool to ERM. The capstone will build on what they’re learning about captive insurance companies in the ‘Risk Financing’ course taking it to a higher level by examining it from a strategic perspective and learning how to use captives within the ERM framework. I am currently seeking a few industry partners to help me enhance the programme and provide data.
How well is captive insurance received by the students?
I think they like it. Unfortunately, many of them hear about captives in terms of tax advantages. I am trying to steer them away from that thinking. Specifically, our focus is that the captive has to have a legitimate business purpose first and foremost. The tax issues are important and will be addressed once a legitimate business purpose is established for using a captive insurance company.
I use case studies to focus them on a captive’s strategic business purpose, and that’s what really gets students interested. When they hear about how firms use captives to solve risk management challenges then they say ‘ok, I’m ready to dive in’.
You mentioned you were developing a captive insurance company lab approach based on four modules taught in the Temple University capstone major, can you talk me through it?
For an organisation as large and complex as Temple University starting another captive insurance company is just not something that’s practical. So, my thought was, how can I provide the students a more structured but ‘real life’ discussion about captive insurance companies.
What I am doing in terms of trying to create a ‘lab’ is to break the captive section into four parts or modules. The first module will examine the feasibility study stage and query how we go about analysing whether a captive makes sense for an organisation? Both from a quantitative and qualitative perspective.
Nicolino Ellis, an extraordinary actuarial student at Temple, is helping me with the quantitative analysis developing a Microsoft Excel based model.
The students will be provided a data set that they will use to calculate loss development factors, an expected loss forecast, develop operational cost assumptions, and then forecast the captive’s after tax net present value cash flows comparing it to another risk financing mechanism such as a large deductible programme, or unstructured self-insurance.
It is important for them to understand that to do a proper analysis and evaluation, they must consider the qualitative aspects as well as the quantitative variables. A captive may not always be the right answer. We need to build this into the evaluation.
The second module will assume that the captive is the right risk financing tool and will discuss implementation—how do we get this thing off the ground? For example, in terms of licensing, what do the regulators need to see to approve the captive insurance company? What do we need to send to the regulators such as the financial proforma, business plan, and programme structure including the use of reinsurance? We will also examine who should sit on the board, captive governance, selecting a captive manager and other service providers, as well as examine other operational and underwriting issues.
The third module will specifically focus on best practices for captive management. What does a true risk management captive look like in terms of how is it being managed? This will include managing the captive from an ERM perspective because the captive has underwriting risks, operational risks, and credit risks if it is using reinsurance. And what does a properly governed captive look like? How should a board meeting be run? What should a board agenda look like?
The fourth module will examine strategic planning. What does strategic planning for a captive insurance company look like? If it’s a single parent captive or a group captive it needs to meet, over the long term, the risk management needs of its parent or parents. So, the board and the captive manager should be implementing a strategic planning process for the captive.
The challenge will be to create the appropriate curriculum to enable the students to evaluate, analyse, and apply the concepts needed to implement and manage a captive insurance company. The goal is to provide an educational experience that enables the students to truly understand captives as a strategic risk management tool.
Our students must be taught to think more critically about how a firm employs a captive insurance company strategy to address its strategic business goals as well as risk financing goals.
Do you think risk management and insurance education needs improvement?
I don’t know if there needs to be a shakeup. I think what we need to do is encourage our students to think critically, to be more strategic and become better communicators, because communication is critical for our industry. I think we have to stop focusing so much on just insurance education and we have to spend more time building out risk management and ERM curriculum. To build a strong risk management foundation our students do need to understand insurance theory, insurance company operations, insurance contracts and coverage. But what I am saying is that more sophisticated risk control and risk financing applications must be integrated into the curriculum along with ERM principles and concepts.
Some universities do it better than others, I’m not saying that one school has it right and one school has it wrong, I’m not the one to judge that, but I do feel strongly that we need to provide a broader perspective on risk management and ERM. I do think that more focus on risk management/ERM strategy and communication is critical.
How important do you think experience is in teaching a topic like risk management and insurance?
It’s very important to have a faculty that includes both those with industry experience and research faculty. The research faculty are critical for building the foundation for the students so they can become strategic thinkers, so they can become more quantitative.
But is also important to expose students to faculty with industry experience. This combination provides a more experiential education, if you will, and brings more ‘practice’ into the classroom.
But it is not one or the other. Experience is very important but it is not more important than what the research faculty bring to the equation, they just have to be integrated well.
Rob Drennan, who is the chairman of Temple’s Risk, Insurance and Healthcare Management Department has done a great job placing our students in internships and full-time jobs after graduation. His focus is on professional development. Students have to work on their resumes, go through interview training, and make sure they’re prepared to meet industry professionals at our career fairs and for interviews.
Most of the students in my capstone course have had an internship which is very helpful.
We need to strike a balance for our students between theory and practice. That’s why the focus on internships is critical. Furthermore, our student professional organisation exposes the students to industry on a weekly basis. They have a lot of classroom work but they’re also encouraged to get practical experience, and we also provide them with a lot of exposure to the industry.
Drennan has built the largest student professional organisation on our campus, Gamma Iota Sigma, and we’re the Sigma chapter. Drennan has succeeded recruiting more than 500 members including risk management and insurance and actuarial science students.
Drennan takes professional development very seriously and I think he has built a model which is being copied by others because he has been so successful, I’m convinced of that.
Does the risk management and insurance industry need to be more involved in education?
The industry has to do more. I see a lot of good things happening but they need to do more. They have to be more visible on our campus. Dan Towle, president at the Captive Insurance Companies Association (CICA), for example, is great and has been very supportive of me. He wants to come to Temple’s campus and talk about the captive industry.
I need to make that happen. Towle and Richard Smith of the Vermont Captive Insurance Association (VCIA) to name a few are doing great work trying to reach out to students. VCIA hosted a large number of our students at its Philadelphia Road Show a few years ago.
Resources is the controversial issue. Temple is a large public university; we are the public university in Philadelphia. We don’t have sufficient resources needed to produce the next generation.
We need more resources to do all we want to do. Developing captive insurance company laboratories takes a lot of time and money. Ellis is great.He is a volunteer and is graduating this month and will go to work with Willis. At some point we’re going to have to pay someone to support this project.
Does the industry need to do a better job of advertising the benefits of working in the industry?
Absolutely. I don’t know exactly how to fashion the message, but the captive insurance industry is kind of hidden. Not because it wants to be hidden but because it is a niche profession.
They need to do a better job of communicating the opportunities, exactly what it means to work in the captive industry.
I think they have to be very clear to the students about the risk management challenges that the captive insurance industry manages for its clients because that is exciting to the students, they want challenges. Globalisation is here to stay and captive insurance is a strategic risk management tool that helps enable a firm to grow and increase in value.
The industry needs to do a better job of communicating what the captive insurance industry does, what are the opportunities, and what are the challenges.
That will really get students excited and drive more students to seek opportunity within our industry, not just fall into it by accident.
What sort of response did you get from your panel at CICA?
Not a big response. I heard a lot of positive feedback about our students and a few people came up to me to talk about recruiting and how to improve it, but it was short lived. I haven’t heard much since.
I was pleased by the immediate feedback about our students because that convinced me that if Temple can get more resources from the industry we can send more students to captive insurance company conferences, enabling the students to see the great things going on, attend the educational sessions, and learn more about the captive industry.
This also gives the captive industry an opportunity to see our students first hand.
The fact that the feedback was so favourable about our Temple students Erin Fleischmann and Angel Song, who attend the March CICA conference, gave me hope for the future.
It showed me Towle is right. We need to bring more students to these conferences.
