Why captives are becoming engines of resilience

Captives are evolving from vehicles for retaining risk into strategic tools for shaping how companies understand, manage and finance risk, according to Adriana Scherzinger, group head of captives at Zurich Insurance Group.

Key points:
Captives are becoming strategic tools
Emerging risks create new opportunities
Resilience is reshaping captive strategy

“The strongest captives we see have a clear purpose, disciplined retention strategies and deliberate use of reinsurance”

“A strategic captive is not defined by how much risk it retains, but by the decisions it enables,” Scherzinger told FERMA Forum Today. In practice, she said, that means embedding the captive in the company’s wider risk appetite strategy, capital and resilience discussions.

It should bring together “risk data, underwriting insight and claims experience” to help the business understand where it should mitigate, retain and transfer risk. A key test, she added, is whether the captive is involved when insurance programmes are designed, “rather than simply being used to finance the outcome”.

New exposures

“The strongest captives we see have a clear purpose, disciplined retention and deliberate reinsurance,” Scherzinger said. They help organisations make better decisions and deploy capital with purpose.

She expects captives to expand into risks where commercial markets are developing, data is improving rapidly or the exposure is strategic.

“Cyber is one example,” she said, particularly as supply-chain and third-party exposures become increasingly interconnected. Artificial intelligence is another. The rapid expansion of AI-driven data centres is creating “very large concentrations of property, energy, construction and business-interruption risk”.

Some of these exposures are evolving faster than traditional insurance solutions can adapt, Scherzinger said. Captives can therefore provide “a mechanism to build underwriting knowledge and capacity around emerging risks”.

She also pointed to Zurich–Oxford research showing that resilience has psychological, physical, social, financial and digital dimensions, closely connected to workplace performance. This creates “interesting questions around how captives can support employee-related risks”.

Climate change is another area where she sees a role. “Climate change is changing the loss landscape,” Scherzinger said, while stronger risk management, better data and targeted resilience investments can reduce losses and support long-term insurability.

“Captives are an important part of that equation,” she said. They can retain predictable losses while commercial insurance capacity focuses on severe and more volatile events. That creates “a direct incentive to invest in prevention, risk engineering and resilience”.

The opportunity, she said, is to “bring the two together”: use the captive to create greater ownership of risk, while the commercial market provides capacity for severity and data and risk engineering make the underlying risk more resilient and ultimately more insurable.

Third-party risks

Scherzinger also expects captives to play a growing role in third-party risks. “A company group’s risk does not stop at its own legal entities,” she said. Resilience increasingly depends on customers, suppliers, distributors, franchisees and technology providers.

But she stressed there is an important boundary. “Third-party underwriting should not turn a captive into a general-purpose insurance company.” Potential licensing limitations also need to be checked, alongside clear strategic links to the parent, strong underwriting discipline, appropriate capital and reinsurance, and sufficient governance to understand aggregation and correlation.

“My view is simple,” she said. “If third-party underwriting gives the parent greater visibility, influence and resilience, it can be strategic. If it is simply about building premium volume, it has lost the plot.”

Regulatory differences

Scherzinger, who has worked across the US and European captive markets, said there is no longer one specific captive model on either side of the Atlantic. Both markets are becoming more sophisticated, but regulatory architecture and market infrastructure remain different, influencing decisions on domicile, capital, governance and fronting.

“In Europe, the evolution of Solvency II and the move towards greater proportionality for smaller and non-complex captives is particularly relevant,” she said. European domiciles are also competing through more captive-friendly frameworks.

“In the US, there is a mature captive infrastructure and a broad choice of established domiciles, alongside a strong appetite for innovative structures.”

But the more important convergence, she said, is that companies on both sides are asking the same question: “How do we use the captive as part of our long-term risk and capital strategy, rather than simply choosing where to license it?”

Looking five years ahead, Scherzinger expects the captive to become “a much more sophisticated risk and capital management platform” sitting “at the heart of the company’s resilience strategy”.

The biggest shift will be from individual risks to interconnected exposures across people, assets, technology and supply chains. “AI and data centres are a good example of risks that cannot be viewed in isolation,” she said.

She expects greater use of data, parametric solutions and alternative capital to create solutions that are “faster, more precise and more responsive to emerging risks”.

She said, captives will become “much more relevant to the C-suite”. Its value “will not be measured by the premium it writes, but by the quality of the risk and capital decisions it enables”.

“That, to me, is the real evolution of captives.”

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