Willis Towers Watson
Following the roll-out of Captive Quantified, Sean Rider from Willis Towers Watson explains how the web-based financial tool is going to transform conversations about captives
What is Captive Quantified?
Captive Quantified is a dynamic and web-based tool to help organisations analyse financial feasibility and future profitability of their captive insurance strategies. We’re excited to introduce this to the marketplace because it really stands apart as the only digitally-enabled tool to perform stochastic financial analysis.
Part of the assessment includes helping organisations choose the best domicile for their individual needs and preferences. The domicile scorecard module draws upon our view of domiciles, where we were able to leverage a range of expertise across Willis Towers Watson to rate each domicile on a variety of important features. Whether it is the quality of the regulatory framework or the appetite for certain lines and types of business, overall, there are 39 different individual metrics bundled into eight to 10 categories.
This enables us to have a dynamic conversation with clients to truly understand what is important, and we can then draw on that broad expertise to make well-validated, well-documented, rationalised domicile recommendations. Alternatively, it may help us to understand that all things being equal, maybe the outcome is neutral between domicile and we can let preference prevail.
The financial analysis component of Captive Quantified is the part that is completely transformative. This module is a unique platform that makes scenario testing instant and straightforward so organisations can see how the full range of potential utilisation would affect their captive. Prior to this tool, the industry was limited to producing forward looking financial statements for feasibility studies and strategic reviews on an excel-based platform, that relied upon static inputs.
If you really think about what component of an insurance companies’ financials drive the outcome, it is the losses. Are they going to be $500 thousand, $1 million, $10 million? The answer to that question is going to be what drives financial outcomes. So, when you do an excel-based financial projection and you input the projected losses, if we are looking at multiple lines of business over multiple years, that exact outcome is one of 150,000 potential outcomes because it’s on a distribution curve. It is a distribution of what is likely to happen, what is unlikely to happen, what is very unlikely to happen–both adverse and favourable.
The financial statements that we have been producing for the past 40 years are all static because the maths is too hard. You need a powerful engine to drive the 150,000 iterations of outcomes associated with the distribution curve of losses, multiple lines of business over multiple years, and this is what we have with Captive Quantified. It allows for distribution curve inputs for the loss component of the financials and as a result it outputs a stochastic articulation of financial performance. Meaning your retained earnings in 15 years are going to be somewhere in this distribution.
Imagine a world where you could produce stochastic forward looking financial statements that produces a range of outcomes and give confidence to financial results for a captive insurance company on the basis of the volatility and dynamics of the underlying losses–that is what we have done.
Imagine a world where you can click on or off a line of business at a certain period of time and see how that impacts the financial results and see what that looks like on the distribution curve.
That gives us meaningful data to describe captive strategy and we can now look at the distribution curve of results, where the CFO has tolerance for risk, relative to their capital contribution and figure out where we can maximise the use of the captive and its value while not blowing up the risk tolerance against core or contributed capital and surplus and retained earnings from the finance buyers perspective, and that is a powerful discussion that no one else is able to have because they don’t have the underlying analytic. This analysis becomes the centrepiece for a conversation around captive strategy.
How did the idea come about/has it been in development long?
The idea of improving the financial analysis component of our feasibility work has been in the works for years. I think it is safe to say that everyone wishes they were moving away from excel into something more powerful. At Willis Towers Watson we have been dedicated to this effort for the past year.
Captive Quantified did not happen in a vacuum and it does not standalone. It is an integral part to how we deliver on our promise to be the analytical broker and risk advisor. This is just the latest in a suite of interconnected tools and quantification models that can be used in combination with other tools to support an organisation’s broader risk mana gement strategy.
What impact has it had so far? What do you think the future impact will be?
Captive Quantified has been rolled out using US accounting, and in short order it will be rolled out with international accounting, which will give it an applicability to captives domiciled anywhere in the world. We are positioning Captive Quantified as a central tool for delivering analysis across a range of scenarios–captive development, captive feasibility work, captive strategy, mergers and acquisitions, so it will be deeply embedded as a core component of our captive work with clients.
We imagine and expect that our clients will see the incredible value it delivers and they’ll experience the pivot in the boardroom that allows them to focus on strategy. They will see the appeal and the importance from a governance perspective and also from an engagement and connectivity perspective.
Interest has been tremendous. We did our reveal at VCIA and the feedback was absolutely amazing. I really don’t think that I am exaggerating when I say that for the entire time that exhibiting hours were active at VCIA, our team was running demos and the crowd around the booth was two or three people deep. It was just phenomenal, the noise, the buzz, and the interest. It was really, really powerful and very exciting for us. And from it, opportunity has flooded.
Do you see the rest of the market?
I could imagine them hoping to catch up. But, of course, our model is not going to be static and it will continue to evolve and advance and we expect to lead the industry. Building this type of a platform takes resource and dedication, it takes a programming capability, a development capability and it takes the technical expertise. At Willis Towers Watson those things have come together, where there is an appetite for building, a commitment to analytics as our fundamentals. Really we have a five-year head start on risk management data and technology and in the captive space, through Captive Quantified, we are intending to fully capitalise on that.
Any final thoughts on Captive Quantified?
I personally am extraordinarily excited about Captive Quantified and what it means in terms of transforming our conversations with clients as to the value of the captive that they have, its prospects for the future and the notion of new captives–and it is the kind of conversation no one else is going to be able to touch, because you can’t just run 150,000 financial iterations in Excel. You need to have a super powerful engine behind it and I don’t really know that anyone else is that committed to this space across the board as Willis Towers Watson and that is a complement to the development of Captive Quantified.
