Honeywell’s dual strategy
Matthew Broomfield
Honeywell is embarking on a strategy that will divide its coverage between two captives. Its recently acquired Vermont-based vehicle will cover domestic liabilities,
while its more established Bermuda-based captive will cover all international risks. It will also be analysing the possibility of writing employee benefits, terrorism risk and trade credit risk
into its captives.
These plans are the latest in a line of changes to the company’s captive strategy made by Lois Fuchs, vice-president of risk management for Honeywell
International. After joining Allied Signal (which merged with Honeywell in 1999) in 1996, she immediately sought to re-energise its Bermuda-based captive, Alchem Assurance, which had spent most of
the 1980s and 1990s in semi-retirement. Honeywell now puts $10-15m in Alchem, which was established in 1972.
SP Assurance Vermont, which Honeywell acquired during its acquisition of Sperian Protection last September, will write approximately $40m of coverage for domestic
(US) risks, including workers’ compensation and auto, general and products liability.
Honeywell may also use its Vermont-based captive to cover elements of its surety programme, which it currently reinsures through Alchem. “Currently the property
programme is remaining with our Bermuda captive, but that may change in the future,” says Fuchs. She is also planning on seeking a rating for their Vermont captive. “One benefit of
having a rated captive would allow our directly issued insurance contracts to be more widely accepted.”
Mergers and acquisitions
Honeywell started using Alchem in 1997 to write US casualty. Since then it has started writing international liability, UK employers’ liability, a pan-European
motor programme, excess property
reinsurance, quota share on their aviation liability programme, and a global property deductible buy-down.
Fuchs then started work on forming a Vermont-based captive to cover US risks, and was set to make a formal application. However, the plan was stopped when Honeywell
acquired the firm that owned SP Assurance Vermont. The decision to retain this captive was a departure for Fuchs’ team and Honeywell, which had previously acquired three captives through
mergers and acquisitions, all of which were amalgamated into Alchem.
Fuchs says reconciling and integrating the captive into Honeywell’s risk management strategy required more work than expected. However, she says it was made
easier by her team’s involvement in the due diligence exercise and early stage decision-making for the acquisition.
“We had numerous discussions with their captive advisors and managers, to understand the underwriting philosophy and risk portfolio, which was somewhat
different from our captive. It involved working with their financial advisors and our finance department to become comfortable with the captive. We also brought in our actuaries, to validate the
studies that had been done.”
Wider reach
Fuchs’ team comprises 10 members, including herself. Six are based at the New Jersey corporate headquarters, while other members are based in Arizona, Dublin
and Mumbai. They use Aon as the captive managers for both captives, and PricewaterhouseCoopers as their actuaries, but use multiple brokers, including Marsh, Aon, Lockton UK and Arthur J
Gallagher.
Most of Alchem’s programmes are reinsured, with Fuchs’ use of brokers varying from risk to risk. “We have close relationships with our carriers so
while we do use brokers, many times it’s a direct relationship with the carrier, and we use the broker to assist us with the transaction,” says Fuchs.
Her team also directs Honeywell’s casualty and property loss control and prevention programmes, liaising closely with their corporate health and safety
department as well as their outside vendors, Global Risk Consultants (GRC) and ACE’s ESIS.
“GRC and ESIS have been critical partners in helping to identify and reduce risk. We have strong internal and external relationships to help us drive rigorous
loss prevention which helps us to reduce the risk and ultimately benefit our captive,” explains Fuchs. “We have approximately 1,300 locations around the globe in four very diverse
business groups, with a risk management team of only 10. It is essential that we have partners, like our brokers, GRC and ESIS, that are an extension of our department.”
Honeywell numbers
• $36bn estimated revenue in 2010
• 130,000 employees in over 100 countries
• Honeywell’s operations include aerospace products and services; control, sensing and security technologies for buildings, homes and industry;
turbochargers; automotive products; speciality chemicals; electronic and advanced materials; process technology for refining and petrochemicals; and energy-efficient products and solutions for
homes, business and transportation.
Future programmes
Fuchs may evaluate using the captive to help finance some of its trade credit exposure, which is currently self-insured. This review began when one of
Honeywell’s businesses approached Fuchs, and one of her risk managers started looking at risk transfer solutions.
“In the end, we didn’t place a programme. But since speaking to the business, I came to the conclusion that it was something we might do, to support the
business, cap their exposure and remove volatility, and possibly provide some administrative savings,” says Fuchs.
Honeywell’s global property programme, which includes contingent business interruption cover (CBI), renewed just after the Japanese earthquakes in March. Fuchs
says they renewed successfully, but also that it was a “difficult renewal” given the recent natural catastrophe events. “One area of
coverage that we sought higher limits was for CBI but we were unable to obtain the limit we wanted,” she explains.
As well as writing some terrorism insurance through their captive, Fuchs is looking at evaluating Honeywell’s supply chain exposure to determine if the captives
could assist the businesses.
Employee benefits is another area of focus. In early 2010, Fuchs began analysing long-term disability programmes. Other projects interfered, so the analysis
didn’t progress, but Fuchs plans on reviving it later this year. “While we have always recognised the captive as a valuable risk management tool, we are very pleased when our businesses
and other functions approach us to identify ways for the captives to help them solve business issues.”
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