Cash flow is not key for captives, says study

Captive insurance businesses don’t necessarily boost their parent’s cash flow, according to a new study by academics at California State and other universities.

The research by professors Jiun-Lin Chen, Shane Chang, Harold Weston and David T Russell examined the constituents of the S&P500 in 2020. As it noted, the captive structure is usually expected to offer parents “a potential upside” of improved cash flow from retaining and investing recaptured premiums.

Its analysis of the companies’ data did not support this, however. While captives were more common among larger firms and those with lower cash holdings and better profitability, there was little evidence of captives improving the parent’s cash flow or smoothing cash flow volatility.

“Overall, our results suggest that companies opt for captives over commercial insurance solutions to optimise managerial preferences and to expand corporate risk-financing options,” the authors wrote.

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