Opportunities amid crises: A RIMScast with Joe Tocco

Global pandemic. Economic volatility. A new “normal” for organizations in every industry. 2020 has been a remarkable year for emerging risks, and one of the early lessons is the 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 tools for making organizations more resilient.

As the rapid emergence of the coronavirus pandemic has shown, preparedness for interruptions from future risk events will be increasingly important. As severe as the impact of COVID-19 is, other risks continue to raise concerns, such as cyber risks and energy disruptions. The need for resilience in the face of emerging risks has perhaps never been greater.

Captives offer a number of significant benefits in making their owners more resilient, including:

• Pre-loss funding. The ability to finance future losses through a captive offers considerable efficiencies, not least being a ready source of capital to pay for unexpected losses. Rather than using other funds on 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, captives are potentially even 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 greater risk assumption.
• 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 are able to 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 cyber.
• Direct connection to a supporting network. Key assets and at times a necessity for captives is their connection to a broader environment of risk expertise and service providers ; a captive owner does not need to worry about “going it alone” and finds tremendous value in partnership with a strong fronting carrier. Captives also have the ability to directly access reinsurance markets, a large and global source of capital. Captives can plug into insurance partners’ expertise in underwriting diverse risks, handling complex claims, and complying with regulatory requirements in different geographies. Fronting services, for example, can enable a captive to cost-efficiently expand its writings to increased geographies, customers, suppliers and even third parties.

The unprecedented lockdown imposed by governments across the world to try to combat the spread of the COVID-19 virus has impacted societies and businesses in many ways. Individuals and business across the globe have found new ways of working to adapt to the need for social distancing and restricted movement of people.

For many industries, this has meant an uptick in their use of autonomous technologies to perform certain functions to reduce the need for physical contact between human beings.

From urgent medical apparatus to pizzas, autonomous vehicles have been used to deliver supplies to those who need them, without the need for human contact. In China, where COVID-19 first had a dramatic impact at the start of this year, many providers have expedited their adoption of driverless delivery vehicles, for example.

As national and local governments take steps to reopen the economy after the COVID-19 shutdown, businesses are exploring ways to navigate through uncertainty. The team at AXA XL remains closely connected to customers and brokers, providing insights on how commercial bonds can help return to productivity and advance toward objectives.

Based on conversations with our customers and brokers, we learned they are focusing on four main goals to recover from the coronavirus pandemic. Notably, each area presents an opportunity to use a commercial bond:

• Protecting employees while achieving productivity. While millions of workers in administrative and other roles who can work remotely are doing so, many others who need to have boots on the ground must practice social distancing and take additional protective measures. Public health and workplace policies continue to evolve with guidance from the World Health Organization and Centers for Disease Control & Prevention.
  Wherever and whenever employees are working, there are occupational risks. For that reason, workers compensation programs are critical every day. A common structure in workers comp programs is a large deductible or self-insured retention, but these generally require employers to post equivalent collateral. Often these take the form of a letter of credit (LOC). A workers comp deductible bond is a cost-effective option that frees up credit for other corporate purposes while helping employers guarantee the payments within the deductible and self insurance retention layers.
• Stabilizing supply chains. Supply chain disruptions are forcing many businesses to evaluate alternative sourcing options and create contingency plans, such as inventory buffers of critical components. To ensure the flow of supplies, some organizations might consider short-term loans for key suppliers and expedite their qualification of new suppliers. Commercial bonds can guarantee completion of supply contracts as well as the payment of customs duties on imported materials. 
• Maintaining customer engagement and support. Businesses everywhere need to communicate with customers and manage their expectations. This is important all year long, and especially when operations are disrupted. While businesses should not overpromise in times of uncertainty, a good way to meet customers’ needs and provide assurance is with completion or performance bonds. These commercial bonds respond when a vendor is unable to fulfill its contractual obligations.
• Increasing liquidity and financial resources. When normal operations are disrupted, maintaining liquidity is paramount. Some methods businesses use to increase cash on hand is to seek payment from customers sooner, extend accounts payable where possible, accelerating collections and even factoring receivables. An overlooked area is freeing up lines of credit when businesses must post LOCs. Commercial bonds can replace LOCs and enable businesses to use their credit facilities to enhance liquidity.

How commercial bonds work
All commercial bonds work on a simple principle: A bond from the bonding company, also called a surety, guarantees that compliance, financial or performance obligations are met. Commercial bonds are one of the most diverse forms of financial protection available, able to respond to a variety of different situations. For example, commercial bonds can guarantee:

• Financial security required by courts for appeals and other judicial processes.
• Payment of customs duties, taxes and fees on imported goods.
• Compliance obligations such as license and permits.
• Financial obligations such as lease and utility payments.
• Decommissioning of assets after their useful life.
• Reclamation and restoration of land used for extracting natural resources.
• Performance and payment of service providers.
• Supply and installation of equipment.
• Completion of development projects.
• Many other miscellaneous financial or performance obligations.