Captives at the core of risk finance

14 June 2019

Captive insurance companies have been around for more than 50 years and are, by far, the best known alternative risk transfer solution — 78% of respondents from our 2019 Excellence in Risk Management Survey that use or have used alternative risk transfer solutions have used a captive.

A main difference between a captive and alternative risk transfer solutions — such as parametric coverage or integrated risk programs — is that a captive uses a company’s own capital, not a third party’s.

Captives have proven to be effective in financing self-retained losses for both large and small companies. Owners gain flexible options to finance emerging and high-severity risks, such as cyber liability and terrorism, although there is significant room for growth in using such alternatives.

More than half of survey respondents using a captive said they plan to expand its use into other areas in the coming years.

As some Excellence focus group participants pointed out, it’s relatively simple to compare one’s captive to that of peers, adopt best practices, and gradually expand the captive vehicle’s use.

“We’ve been working with captives successfully for some years,” said the risk manager for a multinational hospitality company, adding that the organization is considering other risks to finance through the captive, including cyber.

Data from the 2019 Captive Landscape report found that the biggest key driver for forming a captive is to act as a formal funding vehicle to insure risk that is being self-assumed by the parent company.

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Captives can be a crucial component for companies interested in non-traditional solutions, due largely to their flexibility in accessing alternative risk capital.

It is often difficult for companies to access alternative risk solutions without using an insurance vehicle — in fact it is an endeavor that few undertake. Instead, many organizations use a special purpose captive as a conduit to access investors.

This allows them to purchase tailored risk solutions, most notably catastrophe bonds and integrated insurance products. Increasingly, captives are being used to insure emerging risks including wildfires, asbestos, and cyber.

Creating a captive can thus be a stepping stone for those wanting to diversify their risk finance portfolio.

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Among Excellence respondents who have researched alternative risk transfer solutions and expect to use them within two years, 69% are looking to captives. If increasing numbers of organizations use their captives to access non-traditional risk capital, it could in turn help bring more alternative risk transfer solutions into the mainstream.

Brian EloweTALK TO AN EXPERT

For further information, please contact Brian Elowe, Chief Client Officer at Marsh on 617 416 9835.

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