One Small Step...(Captive Review)

IN JUNE 2008, YKK Corporation of Amer­ica hit the insurance headlines in becoming the 14th US company to receive US Depart­ment of Labor (DoL) approval for funding employee benefits through a captive.

However, you probably already knew the name YKK without really being aware of it. In an idle moment, while inching through airport security or queuing at an ATM, a close study of the zip fastener on your bag or jacket will more than likely have revealed those three letters on the tag. 

"We're the zipper leader in the world," says David Schwartz, senior vice-president of risk management for YKK Corpora­tion of America, a wholly-owned subsidi­ary of the Tokyo-based YKK Corporation. "We have a big operation in London that controls about 29 countries in Europe and Africa. Then we have a block of companies in Asia, China, Australia and New Zealand."

With a global income of $5.65bn, the YKK Corporation is a colossus amongst zip­per manufacturers and YKK Corporation of America is one of the largest units outside of Japan, with two main brands: YKK and YKK AP (the latter acronym is for 'architectural products'). The US group's Vermont captive, YKK Insurance Company of America, writes business for the US operations only. 

As well as conventional zippers, YKK also produces jeans, as well as 'hook and loop' fastenings and zippers for more exotic products such as pilot's g-suits and, potentially, spacesuits. Another subsidiary, Tapecraft Corporation, produces webbing for use in products like seat belts and child car seats. This connection with the auto industry contributes significantly to the liability element of the captive. 

YKK AP diverges significantly from the other operations in that it produces 'archi­tectural aluminium products' - in essence, office windows and doors. The Japanese arm also includes a machinery manufactur­ing group. 

"My main focus for risk management, and one of the reasons we have the captive, is for looking towards the future, going into regulated markets that have a higher risk profile," says Schwartz. "That would include commercial office buildings and residential homes, new and replacement. Those pose additional risks to the apparel business." 

YKK's Japanese parent first began in 1934, with the US subsidiary following in 1960. Schwartz joined the American opera­tion in 1981 and says that the company's risk-management department was started from scratch the following year. His tenure with the company has largely informed YKK's risk-management philosophy to date.

YKK Insurance Company of America was not licensed in Vermont until 2002, but YKK Corp's captive discussions go back much further. "I started talking about a captive in about 1995/1996, but it took many years to get the concept across, especially in a multi­cultural environment," says Schwartz. 

"What really got the thing started was teaming up with my treasurer. We used a reputable accounting firm and they had a team of people working with us on the cap­tive who were Japanese." 

At YKK, all capital requirements for new subsidiaries needed to be approved by the board of the Japanese parent, led by Tadahiro Yoshida, president and son of the founder, Tadao Yoshida. Schwartz found initially that he was up against the Japanese parent company's policy of 'total vertical integration'. 

"That comes from a philosophy called the Cycle of Goodness," explains Schwartz. "Tadahiro Yoshida's father thought that you should make all your own raw materi­als, machinery and products and not use external third parties.

"That philosophy of total control over cost, quality, supply and reputation hasn't changed since 1934. So when I took over, I said: 'You want to be totally vertically

integrated? Have your own insurance com­pany'," he says. 

The captive's first line of business was insuring workers' compensation in the state of Georgia through a deductible reim­bursement programme. "We were already self-insuring in Georgia but we decided to reinsure, to do the US$250,000 deductible through the captive," recalls Schwartz. 

That first line of business stayed pretty steady for the first four years of the captive's life until 2007, when YKK Corp of America branched out and put a portion of its prop­erty insurance into the captive. 

"The hush word is you start a captive for tax savings, to approach the reinsurance market yourself, or for difficult-to-place business," says Schwartz. "But I feel the cap­tive has created a strong culture within the company to control losses." 

Then, YKK Corp of America received US Department of Labor (DoL) approval for funding employee benefits through its cap­tive last year. The company, aided by Spring Consulting Group, has chosen to structure basic life and accidental death and dismem­berment (AD&D) through the captive. 

"We're the only Japanese-owned company in the world that has that," says Schwartz. "We initially looked at basic life, AD&l), short- and long-term disability (LTD) and also stop-loss. We did a feasibil­ity study and we determined that, based on our loss history, we would just do the basic life and AD&D." 

YKK Insurance Company of America decided to retain half that risk and reinsure the remainder through AIG subsidiary American General. Schwartz has had an ongoing relationship with AIG on the prop­erty/casual side for the last five years. How­ever, the declining fortunes of AIG have presented Schwartz, with a few problems. 

"I have a board to report to and with AIG slipping, we're just a step away from where the DoL will say you have to change your programme," he says. "It's difficult to see such a big company get into such problems because of their financial arm. My job was to make my management understand that it's not necessarily the P/C or employee benefits people who are in trouble."

Diversification

The captive programme has also expanded in other ways. Last year, YKK added a large deductible workers' comp programme for subsidiaries in 'all other states', working with Sompo Japan Insurance Company of America. "It's very important to have many customers and be a true insurance com­pany," says Schwartz.

Schwartz is also now considering putting ocean marine coverage into the captive. "Trust me - I'm not worried about the Gulf of Aden, but we do sometimes have some very valuable shipments," he says, refer­ring to the shiploads of copper zippers the company exports globally. "If one ship hap­pens to go down we could have an adverse catastrophic claim."

YKK Corp of America is also planning to include supplemental life insurance (where employees purchase additional life insurance) and LTD. A feasibility study is underway with Spring Consulting Group.

"It's third-party business and is very important for us," says Schwartz. "Because of the DoL exemption our employees would be picking up additional benefits over and above what the company normally provides."

The DoL approval process has proved an expensive one, but although Schwartz anticipates that the captive might not reap a profit on the employee benefits for many years, he is confident that he has made a strong foundation for the future.

"My duty to YKK is to be cost-effective and develop alternatives - and that's what the alternative risk market is about," he says. "We have wonderful casualty loss programmes that are supported from the CEO right down to the line worker - it just fits right in to the concept of the captive as another profit centre."

Further down the road Schwartz is look­ing at difficult-to-place product liability risk, such as medical products for hook and loop, which may or may not be covered be­cause of medical exclusions on policies; and aircraft or spacecraft liability for products.

"Depending on your carrier a spacesuit could be considered an aircraft product. You could have an aircraft exclusion that previously said 'an aircraft product any­where in the world' - now you have to say 'anywhere in the universe'," says Schwartz.

"With things like zippers in jet pilots' g-suits, the question also becomes 'is it part of the aircraft or of apparel?' Then you have to sit down with underwriters and decide whether it is covered or not."

However, like the birth of YKK Insur­ance Company of America, any expansion plans will happen in their own sweet time. "We're doing this in small steps. That's part of the Japanese philosophy - take one step at a time and grow your business," says Schwartz. "We're adding lines very con­servatively and learning the process."

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