Tech companies turn to captives as cyber risk increases: CIC Services

An increasing number of tech companies are replacing or supplementing commercial insurance with captive insurance, according to Randy Sadler, principal at CIC Services.

“Captives can address losses associated with complex threats and insure any gaps in commercial policies, so they’re an ideal vehicle to protect tech companies,” said Sadler. “And as a form of self-insurance, when losses don’t occur, the company keeps the profits accrued in the captive insurance company—a powerful strategy.”

Sadler warned the constant evolution in the technology industry can be highly disruptive for companies operating in this sector, with COVID-19 only exacerbating these risks.

Recently, the FBI’s cyber division reported the number of cyberattacks is up to 4,000 a day, a 400 percent increase compared with pre-COVID-19 numbers. This leads to losses of both tangible and intangible assets, with the latter potentially even more costly.

The Commission on the Theft of American Intellectual Property estimates the annual costs from the loss of IP ranges from $225 billion to $600 billion.

Sadler urged companies to invest in cybersecurity and track intellectual property and limit access to information, and to ensure there are no gaps in the coverage they receive from commercial carriers.

Well-managed captives can use tax-favored treatment to accumulate loss reserves to provide much-needed protection, noted Sadler, meaning that over time captives can become profit centres and even provide financial rewards back to their parent companies.

“When it comes to crafting a risk management strategy, it’s critical for tech companies to recognise that the stakes are high and these risks are ever-evolving,” said Sadler. “This is not a place to cut corners. Businesses need robust strategies that combine both active and passive measures and comprehensive insurance coverage that address all facets of risk.”