Captive evolution gathering pace

Versatility and flexibility are the signature characteristics of captives. Hylant’s Alex Gedge (pictured left) and Claire Richardson (pictured right) review the areas in which to expect significant expansion. 

Companies have typically employed captives to access cost savings, address gaps in their commercial insurance coverage or seek alternative capacity when market premiums appeared excessive. As risk managers experimented with strategies to handle specific, often unique, risks they quickly recognised captives would be a prudent way to address others.

Today, captives are sophisticated strategic risk tools helping companies manage cyber threats, employee benefits, climate-driven exposures and emerging risks traditional insurance markets increasingly struggle to cover. As risks, shrinking capacity, coverage limits and market volatility drive commercial premiums ever higher, risk managers increasingly realise the transformative role captives can play in achieving key objectives. 

Company leaders are discovering how captives ever more influence broader business strategy and capital-allocation decisions. Instead of simply serving as another insurance strategy, they’re viewed as a key component of enterprise risk management – as well as a window into risk patterns and causes. Stabilising long-term insurance costs creates a competitive advantage and moght even give leaders the confidence to pursue innovation or expand into volatile markets. As managers opt to protect more risks through captives and make more efficient use of capital, global captive surpluses have multiplied to more than $100 billion.

While the captive industry is undergoing constant expansion in both application and size, much of the current growth is occurring in several key categories. We’ll explore how organisations are currently employing captives in each.

Cyber

 Just a few years ago, cyber insurance was largely seen as an optional insurance product many companies considered unnecessary. Today, it’s viewed as critically important coverage, just like property and liability insurance. Cyber premiums have grown into the billions and are expected to keep expanding through the foreseeable future. 

Company leaders have noticed that cyber events can be catastrophic to the viability of a business. The financial impact is often startling, and according to the Munich Re Global Cyber Risk and Insurance Survey 2024, 72% of C-suite executives surveyed are either concerned or extremely concerned about cyber losses. Beyond the immediate impact, there are often tangential losses such as sudden revenue drops, business interruption issues, inaccessible data and even reputational damage. Many companies also struggle with increasingly restrictive underwriting requirements and sharp price swings that complicate long-term planning.

Couple that level of risk with the significant limitations and exclusions attached to most commercial cyber coverage, and you have an ideal environment for a captive. The approach allows organisations to customise protection to their unique risks and build additional layers of capacity while funding resilience and prevention efforts. We see a lot of interest in exploring captives for different tiers of companies’ coverage towers.

“(Captive) success demands access to deep historical data and the knowledge of experienced professionals at every step.”

Benefits

Agreement on the value of generous employee benefits programmes for employee recruitment and retention is universal. Unfortunately, premium and payout increases mean those benefits claim an ever-larger share of the budget. Captives offer a sound way safely to retain more risk while reducing costs over the long term.

A common application is medical stop-loss structures, where we see clients use captives to allow them to negotiate a higher attachment point for their stop-loss carrier. A company that has historically maintained stop-loss coverage at $250,000 might use a captive to move to a $500,000 plan. Ideally, they’ll retain dollars in favourable claim years while continuing to minimise their overall expenditures on commercial coverage. They can also adjust those coverage amounts for individual employees who have been lasered out of a programme.

With benefits, a key advantage of captives is their inherent flexibility. Companies can add programmes that meet their employees’ wants and needs, whether that’s mental health, financial wellness and coaching, holistic well-being or any other area. No matter what’s covered, the key to a benefits captive’s success is all about data and how it’s monitored and analysed. Once you understand the sources of costly claims and can spot patterns, you can take preventive steps. When the data shows a particular class of employe develops musculoskeletal claims, there might be an ergonomic solution.

If your company does business globally, captives can also help ensure your benefits programme is equitable across all jurisdictions. For example, the captive can cover the cost of providing benefits to same-sex partners, regardless of where they live, or offset the cost of maternity and paternity leaves in places with less-generous laws.

Climate

A generation ago, the climate’s effect on risk basically came down to damage from the occasional severe storms or flooding. Today’s climate-driven exposures are reshaping risk management strategies. Threats such as major hurricanes, flooding, wildfires and violent thunderstorms are seen as more common rather than rare worst-case scenarios. 

Captives give organisations the power to tailor property and liability coverages to reflect the specific threats to people and assets. They also let companies expand the layer between deductibles and catastrophic coverages. The underwriting profits generated by a well-structured captive can be used to support risk prevention and resiliency initiatives, such as facility hardening, supply chain diversification, and back-up power sources. That provides excellent balance sheet protection while supporting a more strategic approach to sustainability. 

Beyond climate, the captive approach can also be an ideal way to ensure organisations meet ESG standards everywhere they do business. It’s increasingly common for large companies to insist that their vendors and business partners conduct themselves under the same standards. If the company or a key supplier falls short of those expectations, leadership might face costly, potentially litigious decisions.

Parametrics

Creating parametric coverages dramatically simplifies and shortens the claims process for property and business operations losses. Instead of requiring claim filings and reviews, any loss-causing condition that can be triggered by an independently measured factor – such as a set amount of rainfall in 48 hours – automatically generates a payment. Rapid payouts can help companies maintain operations and liquidity during disruptions, whereas waiting months for a traditional claims review could lead to cascading financial consequences.

Companies are using parametric programs to cover losses from weather events, supply chain disruptions, event cancellations and reputational triggers. They’re combining captives with parametric factors in complicated and interesting ways. Any situation for which there’s some kind of measurable and independent index is a potential candidate for the approach. Beyond its effectiveness in measuring volatility, captives offer a structured solution to complement existing commercial policies and fill coverage gaps.

Expertise 

Of course, captives aren’t a one-strategy-fits-all approach to a company’s risks. Nor are they easy to establish. Organisations must navigate regulatory requirements, domicile considerations and governance obligations that vary by structure and jurisdiction. Success demands access to deep historical data and the knowledge of experienced professionals at every step, from actuarial work and negotiations with reinsurers to risk-reduction strategies, ongoing service and adjustments to retainages based on the captive’s performance. Those professionals employ techniques such as risk mapping, scenario analysis, data analytics and surveys and interviews to ensure alignment between coverages and exposures.

Captive evolution will continue as companies confront emerging risks and seek more flexible, data-driven ways to protect their organisations. We’re excited about what’s ahead for captives and the companies that choose to use them.

Alex Gedge and Claire Richardson are senior captive consultants at Hylant

They can be reached at Alexandra.Gedge@hylant.com and claire.richardson@hylant.com

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.

Did you get value from this story?  Sign up to our free newsletters and get stories like this sent straight to your inbox.