Corporate captives are taking on a more permanent and strategic role as organizations seek greater control over insurance programs, emerging risks and global exposures, according to Swiss Re Corporate Solutions.
Dan Golden (pictured), head of captive and fronting services at Swiss Re Corporate Solutions, said captive use is becoming less dependent on fluctuations in commercial insurance pricing.
“There’s really a structural shift happening in the market where captives are taking less of kind of a reactive, cycle-dependent role on their programs and taking a more meaningful role on those programs,” Golden told Insurance Business America.
This change, he said, reflects the growing sophistication of risk management teams, better access to data and underwriting technology, as well as companies’ expanding financial strength and risk appetite. Businesses are increasingly using captives to retain risks that fit their corporate appetite while turning to commercial insurers or reinsurers for catastrophe protection.
The approach allows companies to define the largest loss they are prepared to absorb over an annual or multiyear period. It can also reduce volatility, control external insurance spending and keep more premium within the organization.
Captive participation has continued even as portions of the commercial market have softened and traditional capacity has become more readily available. Golden said pricing is only one consideration because routing risks through a captive can give organizations more influence over underwriting and claims.
“What we’re seeing is a growth in what’s called optimization studies, where captives and risk management departments, finance, and treasury will look at the balance of risk versus reward in retaining the risk,” he said. “That’s informed by what’s going on in the market, so retention levels will change in line with market conditions. But it is still going through the captives as a first step.”
Routing risks through a captive can also give an organization more influence over underwriting and claims, making pricing only one element of the decision. “It’s a control and ownership matter over the insurance program where the pricing is just an element of that and the pricing can still be addressed based on how much they retain in the captive,” Golden said.
Captives are also becoming relevant to businesses beyond the large, established corporations that have traditionally dominated the market. Loss-prone industries may use individual, group or cell captives when conventional coverage is difficult to obtain.
Startups and smaller businesses developing new technology may also consider the structures when insurers lack the historical data needed to price unfamiliar exposures. “If it’s truly new and innovative by nature, you’re not going to have the decades of data that the insurance industry relies upon,” Golden noted.
A captive can enable the company to retain an initial layer of risk while commercial markets participate above it. As insurers collect data and become more comfortable underwriting the exposure, additional capacity may emerge.
AI and data centers are among the technologies creating new exposures, Golden said, adding that captives can play a meaningful role in addressing them from both an industry and buyer perspective.
Innovation is also changing how captives buy reinsurance. Rather than participating in a program alongside other insurers, a captive may fully insure its parent’s exposure in a particular line and then purchase reinsurance protection according to the organization’s risk appetite, Golden said.
Some businesses are extending that concept across property-casualty, employee benefits, cyber, warranty and contractual liability risks. They can then seek blanket protection across the portfolio through an integrated risk reinsurance program.
One particularly significant development is the use of captives to support customer-facing insurance products. Historically established as risk management and cost-control vehicles, some captives are now being integrated into their parents’ commercial operations.
“Captives are being more and more integrated with their front-end businesses and they’re actually being used to help drive revenue and acting as a profit center for their parent company,” Golden said. “As M&As and divestitures happen, and new markets open up for companies, we’re seeing those risks in those countries still making their way back to the captives via fronting arrangements.”
Golden described the model as a business-to-business-to-consumer arrangement involving third-party exposure, rather than limiting the captive to its parent’s property or other first-party risks.
Finally, global expansion is providing another source of growth. Captives are increasingly participating as reinsurers on controlled master international programs, allowing multinational companies to obtain admitted local policies through a global fronting insurer and reinsure the exposure back to the captive.
The structure can preserve centralized oversight while meeting local insurance and regulatory requirements. It can also accommodate changing corporate footprints as businesses complete acquisitions, divest operations or enter new markets.
Swiss Re has brought its captive capabilities together through a group center of excellence covering captive insurance and reinsurance, fronting, data, risk engineering and related services. Its offering also includes legacy solutions for businesses seeking to consolidate captives or move them between jurisdictions following corporate restructuring.
“We want to be known as kind of a one-stop, one-size-fits-all for providing these captive solutions in the large corporate market,” Golden said.
