Jonathan Barnes, Mark Allit, KPMG
17 May 2021Feasibility studies analysis

Captive trends in the hard market

The billions of dollars that have flowed into the global property and casualty re/insurance market over the past 12 months signal that investors see corporate risk as an attractive bet. But why shouldn’t corporations back their own risk, while making a return for themselves, rather than allowing others to do it? The argument for forming a captive has rarely been so compelling.

“Broader policies, with fewer exclusions and without a profit motive for the insurer, can be designed specifically to protect the company.”

Risk managers renewing policies in a hardening market, with prices rising across the board and terms tightening, will need little convincing of the potential for lowering costs. But they may have to lobby the C-suite to win the capital allocation necessary to form a captive and have to prove that this is a better use of the capex budget than other business development options.

Quantifying the savings will provide persuasive data in the current market, but there are less obvious, longer-term benefits that strengthen the case for a captive. One stems from the fact that the world is changing faster than the insurance market.

New types of risk are emerging from:

• Changing customer demographics and expectations;

• The rapid advance of technology and disruptive innovation;

• The growing importance of intangible assets that increases exposure to reputational, intellectual property and human capital-related risks; and

• The growing focus on environmental, social and corporate governance factors, which puts higher pressure on business practices in the context of sustainability and social purpose.

In this fast-changing environment, a company’s risks may not match up with the products available on the commercial insurance market. KPMG analysis found that many key risks, including business interruption following a cyber event, disease and pandemics, supply-chain failure, changes in regulation and political uncertainty are either not or only partially insurable.

A captive allows its parent to write bespoke insurance policies to cover its actual risks. Broader policies, with fewer exclusions and without a profit motive for the insurer, can be designed specifically to protect the company. The interests of the insurer and the insured are aligned. Having access to relevant insurance products that competitors do not is a competitive advantage.

A bargaining chip

Having the captive option in your risk-management toolbox also changes the dynamic in negotiations with insurers—the captive can be a bargaining chip. Over time, captive ownership will also lead to a deeper understanding of a company’s own risks, enabling risk managers to present themselves better to the market and increasing their negotiating power over the long term.

Setting up a captive is straightforward, but the thoroughness of the feasibility process that precedes it will determine its effectiveness. Rushing to start a captive as a short-term solution to rising renewal rates could prove to be an expensive mistake. In forming a captive, a parent is creating an associated regulated entity that it can’t step away from easily.

The feasibility process should include:

• Looking at the company’s overall risk picture and building a program from it;

• Choosing the right structure for the captive;

• Determining how much risk to retain and cede; and

• Choosing a domicile with consideration of the tax, capital and management ramifications.

A captive could provide protection against most property and casualty risk, and many have been used more widely to include risks such as directors’ and officers’, trade credit, surety, political risk and cyber. Employee benefits risk is another option that could help to diversify the captive’s portfolio, given its lack of correlation with other events.

It’s important to remember that forming a captive is not a binary decision: there are many different approaches possible. One of the best captive strategies is to start small. It requires less capital, while creating a foundation to build on.

Mark Allitt is managing director at KPMG in Bermuda. He can be contacted at:

Jonathan Barnes is senior manager advisory at KPMG in Bermuda. He can be contacted at: