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Banking and finance: Why and how to use alternative instruments in your risk finance programme

By Marc Paasch , Vittorio Pozzo and Luc Schwartzbrod | October 3, 2023

Captives, structured insurance and risk portfolio optimization can create value and new opportunities when banks find cover hard to secure or too expensive.
Captive and insurance management solutions|Risk and Analytics

Concerns on the stability of the financial system are increasing in light of bank failures. There were 532 bank failures globally from 2008 through 2019. From 2020, there have been six failures, including U.S. institutions Silicon Valley Bank and Signature Bank, while Europe has seen the demise of Credit Suisse and the investigation this year by French authorities into suspected tax fraud and money laundering by five major international French banks.

In addition to ongoing stability concerns, we expect to see several further key trends in the banking and finance sector, including drives to balance digitization with evolving cyber risks to achieve operational efficiencies, a growing focus on sustainability, and also moves to invest in bridging the gaps between decentralized finance and traditional finance to unlock business value.

Using alternative ways to structure risk transfer, such as captives, structured insurance, can help reduce costs and increase capacity. Risk portfolio optimization, meanwhile, can open up new opportunities and change the narrative on your risk when presenting it to markets, irrespective of the complexity of the risk in scope.


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.

Captives are also a useful enablement tool to provide coverage for risks markets don’t want to cover or are too expensive to obtain, helping you better manage risks, reduce overall insurance costs and increase retention levels to access to markets that would be otherwise inaccessible.

While you can use captives to address lack of capacity around risk lines highly impacted by hard markets, these arrangements can also help support broader opportunities. For example, a captive might pay for employee benefits where a multinational company is seeking to harmonize health benefits across territories.

More broadly, retaining certain risks within a captive can change insurer perspectives on your risk and the ways in which the business is seeking to manage it, potentially freeing up more capacity in across other lines and reducing the total cost of risk.

Structured insurance

Structured insurance provides customized coverage for certain risks over potentially longer time periods. These highly effective arrangements allow you to tailor the coverage to the unique needs of the business to cover a wide range of risks, including credit risk, market risk, operational risk, and natural catastrophe.

You can structure coverage in a numbers of ways, including using derivatives, reinsurance and other financial instruments. For example, a bank may use structured insurance to manage its credit risk, purchasing a credit default swap (CDS) to provide protection against the risk of default on a particular loan or portfolio of loans, with the premium for the CDS based on the creditworthiness of the borrower and the likelihood of default.

Structured arrangements allow for multiline or multiyear structures, offering economies of scale and allowing you to manage the volatility from partially retained risks efficiently over longer periods. For example, a structured arrangement might run over a three-year term and embed cyber risk into a multiline arrangement that also includes D&O and crime cover in one single, packaged solution.

Using analytics can evaluate the likelihood and frequencies of losses to design the optimal structure to present to alternative risk transfer markets to seek capacity.

Risk portfolio optimization

Some companies, including financial institutions, purchase insurance policies for a specific risk they face, thus viewing insurance as a silo. However, given that major losses due to different risks are unlikely to occur at the same time, companies could benefit from cost reductions for higher risk retention if they reviewed insurance as a portfolio of risks. This would need to be justified by appropriate assessments of the entire portfolio of insurance policies, instead of - for example - only the individual deductible or the individual limit of cover.

In addition, some insurance markets sell protection from losses more cheaply than others. By recognizing the advantages of portfolio and arbitrage strategies a company could benefit from this reduced cost if they shifted funds to the best loss protection markets.

In hard markets in particular, visualizing all risks within a single framework can empower your organizations to make better risk finance decisions by identifying the optimal risk financing portfolio along an efficient frontier with the ultimate goal of optimizing your organization’s total risk portfolio.

By providing a wide-ranging, holistic view of the risks a business may face, a risk portfolio optimization might provide tangible solutions that work in an ever-changing world of risk. This approach can model millions of risk scenarios and illustrate potential alternative strategies, helping you reflect and adapt to changes that impact your risk strategies as they occur.

The wide-angle perspective risk portfolio optimization enables means you’re better able to navigate challenging risk landscapes and plot the most efficient course of action built on empirical evidence, and in alignment with the imperatives of the business. This leads not only to better-informed decisions, but also to better business outcomes. Among these advantages could be to reduce spend, reduce risk to release risk capital for deployment elsewhere in the business, or an optimal blend of both.

Putting data around the case for alternative options

Where you’re considering something new, there could be organizational resistance due to a lack of familiarity. This is where robust analytics and modelling capable of putting numbers around the likely value of alternative arrangements can help the business arrive at the optimal arrangements, and where captive feasibility studies which interrogate the most efficient structure and domicile can offer the required level of comfort and confidence to use for the first time.

For smarter ways to navigate the cost of risk for your organization, get in touch.


Managing Director
Global Head of Alternative Risk Transfer Solutions
Global Head, Strategic Risk Consulting
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Director, Europe & Great Britain
Captive Advisory Team
Alternative Risk Transfer
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Alternative Risk Transfer Broker
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