7 July 2020Actuarial & underwriting

How captives support the informal economy

The informal economy is a diverse set of economic activities, businesses, jobs, and workers that are not regulated or protected by the state. The concept was originally applied to the self-employed of small unregistered enterprises, and includes gamblers, drug dealers, and sex workers as well as contractors, landscapers, babysitters, and fitness instructors.

The informal, or ‘grey’, economy accounts for a huge proportion of global economic activity. According to the International Labor Organization, in the US, 19 percent of the economy is grey, and could add a full point to historic gross domestic product, driving growth up to 3 percent, rather than 2 percent. In the UK, 14 percent of the economy is informal (Table 1).

In India, the informal economy sustains almost nine out of every 10 people. About 50 percent of India’s economic activity is day labour, one-man shops, and roadside haircutters. These all operate in cash and pay no taxes.

Table 1: Percentage of total workforce in informal economy

Captives are one tool experts use to address emerging risk exposures. Sometimes those risks are regulatory in nature. Here are several examples of how captives continue to bridge gaps between the mainstream and the grey regulatory environment.


The cannabis industry is forecasting US sales of $20-25 billion in 2021, according to Marijuana Business Daily. Only a few insurers are active in the space because conflict between state and federal law scares many in the industry away. I have lost count of the number of states now legalising cannabis. I have also lost count of the number of captives formed or pending to insure or reinsure cannabis risk.


Cryptocurrency business mostly consists of startups and exchanges. It is not yet considered big enough to provide substantial revenue for the insurance industry. This is the same place cannabis was five years ago. At a conference earlier this year, before the quarantine, while hosting a reinsurance roundtable I was introduced to a gentleman who was looking for reinsurance for his crypto captive.

I asked a traditional reinsurer at the table why he would not do it, and he said: “Bitcoin may not be illegal, but all illegal activity uses bitcoin.” It will be interesting to see where this marketplace is in five years.

Parametric coverage

Parametric, or index-based insurance, has been around for 20 years. It is reaching new levels of popularity as organisations look for additional alternative risk transfer options.

Parametric coverage does not indemnify pure loss. This lack of “true” indemnity is one reason some insurers and regulators do not consider it insurance. One large European insurer now has over 40 people working in their parametric unit and if it is not insurance, this insurer does not seem to care.

I’m working on a new captive for parametric wildfire coverage for California homeowners, which should be a good test for the regulators.

There have been calls for countries to transition to a cashless society as a way to deal with the informal economy. Economist see a great payoff in a cashless society: lower cost for business, stymie tax evasion, and combating money laundering. Critics see another erosion of privacy, widening inequality and new power for governments. Bankers worry about losing control of the money supply to digital networks.

“I’m working on a new captive for parametric wildfire coverage for California homeowners, which should be a good test for the regulators.”

Debit cards first overtook cash as the top way to pay in the US in 2018. With the pandemic spreading, some merchants in badly affected cities have tried to stop accepting cash altogether. In February 2019, Philadelphia became one of the first cities to require local businesses to accept cash, to protect a segment of the population who had no debit or credit card.

In most developed countries, the value of cash in circulation has risen since the financial crisis of 2008–2009 along with an increase in digital payments. This would suggest that cash, particularly large bills, are being used to store value. It will probably remain that way if interest rates remain low and the COVID-19 pandemic persist.

Fighting the government should be nothing new to captive owners. The Internal Revenue Service has been challenging them for years. Usually the captive owners win, because captives are established by their owners for legitimate business purposes.

Captives have filled voids or taken the lead in developing new coverages for years, and will continue to do so, helping to bridge the gap between the formal and informal economies.

Greg Lang is the founder of Reinsurance and Insurance Network. He can be contacted at: