Unlocking captive growth with ILS, cat bonds, and reinsurance

In an evolving insurance landscape, captives and insurance-linked securities (ILS) offer strategic avenues to optimise risk and capital. At the Airmic conference yesterday Rowson, business director at ARM Guernsey, shared insights designed to help audiences understand current market dynamics – and how these can be exploited to grow a captive effectively.

The aim of the session was to help the audience understand current market dynamics and how these can be exploited to grow a captive. 

Rowson emphasised the importance of tailoring policy wordings and sub-limits for natural perils to secure broader cover via the wholesale market. Additionally, the session explored mergers and acquisitions (M&A), loss portfolio transfers (LPTs), and adverse development covers (ADCs) as tools to release capital and reduce management time for run-off covers.

However, examples of insurance-linked securities (ILS) within captives remain rare. “I’ve worked on a few, but they’re very unusual. I even asked colleagues at Howden if they knew of others, and no one did,” Rowson said during the presentation

One pioneering case involved a highly concentrated oil company operating about 14 rigs in a defined block of the Gulf of Mexico, listed on the US stock exchange. “When a hurricane strikes, for health and safety reasons, they must lock down rigs and evacuate staff. Ports like Galveston and Houston get devastated, leaving no revenue, and stock prices plummet,” Rowson said.

The solution was a derivative product linked to a specific wind speed and barometric pressure in that Gulf block. “If the windstorm crossed the block, the derivative automatically triggered a payout – no loss assessment needed. The company could tell the stock market: ‘Our rigs are closed for four weeks, but we’ve just received a $500 million payout.’ Simple, efficient products like these are highly favoured by ILS funds.”

Rowson also noted another case where Credit Suisse purchased a catastrophe bond to cover adverse development in operational risks – a rare but successful example of ILS entering the capital markets, requiring an insurance licence to structure.

Discussing captives and balance sheets, Rowson highlights the “Goldilocks” position – a perfect balance of capital. “If you’re over-capitalised, funds are tied up and not working for you. If under-capitalised, you risk regulatory scrutiny. In that case, reinsurance solutions like retrocession, adverse development covers or portfolio transfers can be vital.”

He presented a US-based case study of a salad and fruit producer facing perceived risks from listeria outbreaks. “They used a fronting company to meet their $15 million public liability insurance requirement, reinsuring that risk back to their captive. This helped manage soaring market prices.”

This layered approach is particularly instructive: retaining the first $5 million, fronting the next $15 million, and issuing direct policies for excess coverage above $60 million. “This reduced their fronting costs and enabled direct access to reinsurance markets, which was both cheaper and easier.”

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