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Outsmarting property risk uncertainty: How can captives help?

Insights from the Outsmarting Uncertainty webinar series.

By John Merkovsky , Rachel Andvig , Peter Carter , Derrick Easton and Ken Giambagno | June 01, 2023

This Q&A tackles the front-of-mind issues for risk managers considering captives to take more control in hard market conditions.
Captive and insurance management solutions|Climate
Climate Risk and Resilience

Retaining more risk can be part of an optimal property risk management strategy. What role can increased risk retention using captives play in outsmarting the current property risk market?

This insight, based on perspectives from WTW’s Outsmarting Uncertainty webinar series, answers some common property risk management questions on the need-to-knows of harnessing captives to navigate the current hard market conditions.

Q: What is the key purpose of a captive?

A: Captives can enhance the financial and operational performance of your organization as a key element of your risk management strategy. A captive is a licensed (re)insurance company owned by a non-(re)insurance group to facilitate its risk retention and risk transfer activities.

Businesses that form captives are able to pay premiums to a dedicated vehicle, creating financial segregation for the risks covered with the added advantage of being able to build reserves against future possible losses. This can be particularly helpful in shielding underlying business units from undue cashflow volatility.

Using a captive is ultimately part of programs designed to secure more efficient risk financing outcomes for your organization. Having a captive opens more options to blend corporate risk-bearing capacity with traditional insurance, reinsurance and alternative risk transfer solutions.

Q: What recent examples of captives to manage property risk is WTW seeing?

A: We’re seeing many organizations using captives at the heart of their global property risk programs to retain the difference in risk tolerance between local operating units and the parent group. This strategy works to reduce the premium payments to insurers outside the group by limiting the use of commercial insurance for risks within the group risk appetite.

Q: How can operating a captive impact the property risk rates insurers are prepared to offer?

A: Having a captive effectively gives your business the same ‘skin in the game’ as insurers. In this way a captive could support insurers in having the assurances they need to sharpen their pricing to better reflect your risk. Your business achieving keener pricing is even more likely if you can back-up your captive and risk management story with your own data about actual loss experience and loss control efficacy.

Q: How can I know the business will achieve value from a captive before changing my property risk program?

Analytics can confirm whether your captive will result in the market giving you sufficient credit for the additional risk you're retaining through the vehicle.

You can also use analytics to explore the interaction of differing levels of risk retention versus transfer to the insurance market. The more risk you retain, the lower your insurance payments to outside companies, the flipside being you will need more capital on your balance sheet to absorb potential losses. The more you retain, the more you will drive up your own cost of capital.

Your aim should be to identify the ‘sweet spot’ to prevent scenarios where the business could face diminishing marginal returns from retaining more risk. Analytics will give you confidence over which risks to retain, whether the price insurers are quoting in the layers is efficient and if it is not, how to replace it with greater captive participation.

Q: Are organizations with captives getting rid of traditional insurance altogether?

A: No. This is primarily down to legal or contractual requirements on having insurance coverage. Also, the extent to which your captive can strategically fill gaps in higher excess layers is not limitless. It comes down to both your organization’s risk appetite and regulatory requirements of how you fund the risk gap between the captive’s resources and the exposures assumed.

Q: What can risk managers do where a captive could prove efficient but a lack of familiarity amongst the C-suite prevents considering captives?

Captive feasibility studies can not only reveal the potential of a captive insurance solution in creating more value for your business, but also act to raise awareness and confidence amongst strategic leaders.

Feasibility studies can forecast claims and premiums, analyse risk retention scenarios, evaluate potential captive domiciles, estimate capital and solvency requirements and create financial projections. They can also examine underwriting guidelines and accounting processes and taxation considerations to support C-suite colleagues in developing their understanding and assurances.

For specialist support on understanding whether a captive could be an efficient element of your property risk program, get in touch.


Head of Risk & Analytics and Global Large Account Strategy, WTW

Associate Director, WTW

Head of Climate Practice &
Head of Captive and Insurance Management Solutions,

Managing Director, Risk & Analytics (Alternative Risk Transfer Solutions)

Head of Global Forensic Accounting & Complex Claims Practice, WTW

Ken Giambagno on LinkedIn

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