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Mitigating talent risks: how the insurance & captive market can help

Mitigating talent risks: how the insurance & captive market can help

25 July, 2023
Capital Markets Captive Solutions Employee Incentive

Talent risks broadly defined, are risks to an organisation associated with the negative impact of permanent loss or temporary unavailability of its key employees. 

These risks can be controlled and financed through various strategies. In this article, Sherman Taylor, Head of Capital Markets in Bermuda, explores how the insurance and captive market can help businesses mitigate risks to their talent.

What is talent risk?

In short, any business wants to attract and retain the best people. Talent risks exist in almost every organisation that relies on skilled and knowledgeable workers. These risks are not new; however, they are attracting more attention of late; not least as a result of recent shifts in workforce trends, with increased employee turnover leading to skills gaps across many industries. The more reliant an organisation is on its people resources, the more exposure that organisation will have to talent risk.

What does captive mean in the insurance market?

A captive insurance company is a wholly owned subsidiary, that has a license to write insurance policies for its parent entity and/or related entities. Companies form “captives” for the primary reason of providing risk mitigation solutions not otherwise available in the wider insurance market, or not available at affordable prices.

What are some of the consequences that organisations face when they fail to retain talented employees?

Losing talented employees is a significant threat for any organisation, and it is very costly to hire and train new people. There are also indirect costs associated with increasing employee turnover, such as loss of productivity, clients moving with their contacts, reputational damage, and stymied business growth.

How can businesses control and mitigate talent risks?

Organisations may choose to use a range of talent management strategies to attract and retain their people, including smooth onboarding, competitive compensation and benefits, development of a talent pipeline, succession planning programs, and providing opportunities for learning and growth. Employee share ownership plans are another great way to retain talent as they provide employees with the opportunity to have an ownership stake in the company, that ‘vest’ after a certain number of years of tenure.

In addition to financial rewards, a company’s culture is a key differentiator. Employee engagement isn’t just a corporate buzz word; smart employers work hard to create a positive and engaging work environment and foster an inclusive culture, hopefully leading to a happier workforce and attracting and retaining top talent from diverse backgrounds.

How can organisations enhance their talent risk financing strategies with a captive?

Even the best talent management strategies are not guaranteed to succeed, and organisations may find it useful to finance their less controllable talent risks through one or more insurance options. These include making use of a captive to self-insure some or all the risks and accessing the reinsurance market for coverage. A captive is an established self-insurance strategy and is suited to financing emerging risks as it provides more structure to the program and establishes discipline.

What are the advantages of captive insurance?

For many businesses, the traditional insurance market does not provide sufficient control and flexibility that they desire. Ten ways that a captive can help are:

  1. Control over the risks covered, which can be tailored to better meet the company’s needs
  2. Operating cost saving due to fewer premium payments being made to third party insurers
  3. Improved cash flow as premium payments stays within the group 
  4. Capital can be invested to generate investment income to fund future insurance losses
  5. Direct access to wholesale reinsurance markets, where insurance rates are cheaper
  6. Flexibility over the company’s underwriting program
  7. Greater control over claims handling
  8. More control over deductibles
  9. Additional negotiating power with brokers and underwriters
  10. Incentives for loss control within the company, since the losses are effectively self-insured

How can key person insurance support an organisation with loss of talent? 

Talent risk insurance is an extension of key person insurance, a common practice amongst many businesses. Existing life or disability insurance policies cover risk of life or critical illness of key employees, and, in the event of the death or disability of a covered key person, the policy pays out a benefit to the business. This financial support can be used to address various needs, such as recruiting and training a replacement, compensating for missed business opportunities, stabilising operations, and facilitating the transition to a new employee. While key person insurance traditionally safeguards high-ranking executives and directors, it can be extended to cover a broader range of employees whose unique talents are equally vital to the organisation.

How can AI help with talent risks?

AI can help mitigate the talent risk exposure of businesses. AI algorithms can identify workforce trends by analysing valuable internal and external data on employee performance, behaviour traits and career ambitions, which in turn enables the organisation to take preventative action and manage its talent more effectively. There are still some ethical and legal hurdles associated with the use of AI and collecting and analysing such large volumes of employee data; as such, this application of AI may still be years from fully coming to fruition. The increased use of AI in businesses has the downside of increasing exposure to cyber risks, which are financial losses and liabilities resulting from cyber-related incidents, network failures, and data breaches.

The insurance industry and captives can play a key role in providing cyber liability insurance designed to protect business from the potential financial damage of cyber risks. Net premiums written for cyber insurance in 2022 was approximately US $12B, and it is expected to triple within the next five years 

How can Ocorian help with talent risks?

When it comes to talent risk exposure, it’s important for businesses to consider financing options such as insurance solutions and the use of a captive as potential risk financing solutions. Ocorian can help with end-to-end advice on how to set up a captive and develop an appropriate insurance program for the captive. Once operational, Ocorian can help to optimise the day-to-day functioning and governance of the captive in line with regulations and best practices.

Additionally, Ocorian’s corporate services team specialise in setting up and supporting a variety of employee incentive plans to reduce the administrative burden on companies.

Contact the Ocorian team today to find out more.