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So you think you want a captive...

Sean Rider | 20th April 2015


We are often approached by organizations who think they want a captive. They want to optimize their risk and access benefits offered by captive insurance companies, take control of their own insurances and exit the commercial marketplace. They have obviously Googled the word “captive”.

Of course we are happy to oblige, but only once the buyer understands what a captive can and cannot do for them. The comment: “I need a captive” is sometimes a proxy for:

  • "I'm frustrated with the insurance marketplace"
  • "I don't value, or don't know how to value the insurances I'm buying, and feel like just taking them on myself"
  • "Can't I do this better myself?"

What are you trying to accomplish?

When we work with clients to help them discover the benefits, utilization, and technology that a captive does represent, we usually start with a conversation about what they are trying to accomplish.

  • Are they looking to make the captive the repository of retained risks for the organization?
  • Are they looking to manage internal retentions across their various P & L’s?
  • Are they perhaps looking to introduce competition in the form of retaining risk into syndicated excess programs?
  • Are they looking to access unconventional or difficult-to-access coverages?
  • Or are they perhaps looking to build an insurance enterprise within their organization to convert the risk management effort from a cost center to a profit center?

From this we invariably need to develop an understanding of their risk retention / transfer program, how they determine what risks are right for them to retain, and what motivates their buying framework.

This is where Willis proprietary tools and process around risk analytics are so valuable: Loss PIQ, RAPID, FIA, and ultimately the Risk Optimizer, deliver excellent frameworks for answering the questions behind the comment “I want a captive” and leaves us to get on with the business of taking a rationalized risk retention / transfer framework and overlaying a captive strategy on top of it.

In many instances the captive is a facilitating infrastructure, enabling an organization to operationally and financially optimize their retained risk positions, access differentiated terms, conditions and leverage in risk transfer plays, and enabling them to profit in entrepreneurial insurance enterprises. All of which come after making a rationalized framework for risk retention and transfer.

How organizations use captives

The manner in which organizations use captives can generally be grouped into four categories: Retained Risk Finance, Risk Transfer Optimizations, Third Party Enterprise Risk, and Entrepreneurialism.

Retained risk finance

Retained risk finance refers to the utilization of a captive insurance company to optimize the management of an organization’s retained risks.

Risks may include conventional insurances such as the deductibles under commercial property and casualty risk placements, areas of insurable risk where an organization has chosen not to purchase risk transfer, and more esoteric risks where commercial risk transfer markets do not offer relevant solutions.

The utilization of a captive insurance company for retained risk finance may offer several benefits to an organization, principal amongst these are:

  • Stabilization of cost for retained risks across a broad spectrum of coverages. This is partly accomplished through applying the impact of successful outcomes in one area of retained risk to offset adverse outcomes in other areas of retained risk.
  • Management of the impact that individual profit and loss statements’ (“P&Ls”) can have on the organization’s decision-making in relation to risk retention. An organization’s individual P&L’s may not have the financial means to sustain the level of retained risks that the overall organization deems appropriate. A captive insurance company can assist in insulating the local P&Ls from the full impact of organizational retained risk decisions whilst enabling the organization to retain risk at levels that they are comfortable with.
  • Improved governance, visibility, transparency and infrastructure around risk retention. A captive insurance company has meaningful governance and regulatory requirements, which call for the organizational leadership to become more aware of retained risks than they may have been otherwise. Further, a captive insurance company requires the use of actuaries, auditors, professional insurance company managers, and other professionals in its operations as well as being under the bailiwick of a regulatory authority who has an interest in the captive insurance company’s ongoing sustainability. These factors align to provide a greater degree of confidence on the part of management in the efficacy and of the organization’s retained risk position.

In many instances the captive is a facilitating infrastructure, enabling an organization to operationally and financially optimize their retained risk positions, access differentiated terms, conditions and leverage in risk transfer plays, and enabling them to profit in entrepreneurial insurance enterprises. All of which come after making a rationalized framework for risk retention and transfer.

Risk transfer optimization

Risk transfer optimization refers to access to reinsurance markets rate and capacity. There is an institutional nuance in the insurance industry where consumers buy insurance from insurance companies, insurers buy insurance from reinsurance companies, and consumers cannot for the most part access reinsurers directly without their own insurance company.

Consequently, when a consumer recognizes that the reinsurance markets are offering better pricing, terms, conditions, or capacity for their risk transfer program, a captive insurance company may be an ideal tool for directly accessing the reinsurance markets and cutting out the middle man that is the commercial insurance markets. This model also applies to certain government-offered insurance backstop programs, such as for terrorism risks, which are only offered to insurance companies. The utilization of a captive insurance company for access to reinsurance markets rate and capacity may offer several benefits to an organization, principal amongst these are:

  • Taking advantage of risk transfer cost and capacity arbitrage as and when they occur in a risk transfer program.
  • Using the captive to introduce competition into a syndicated risk transfer program, though risk retention. A captive provide the necessary infrastructure to ‘flesh out’ excess program, or ‘take out’ overly expensive layer capacity and manage the cost and completion of further excess layer efficiently. It provides the trading infrastructure for risk retention in syndicated programs.
  • Aggregating multiple individual local insurance purchases across a global enterprise into a single insurance program, with a unified risk retention / transfer approach consistent with the organization’s financial wherewithal, while still offering local retentions which are consistent with local financial wherewithal and aligning risk and behaviors.

Third-party enterprise risk

Third-party enterprise risk aligned to enterprise risk management refers to a large host of scenarios in which a third party (from a technical insurance perspective) needs to purchase insurances. The organization can provide a mechanism through a captive insurance company, for that third party to purchase the required insurances, and in so doing, the organization improves its enterprise risk management platform.

Through selectively incorporating these risks into a captive insurance company an organization may take control of the operations, premiums, claims management, and overall functionality of these insurance programs. In doing so, they better align the programs to meeting the organization’s mission, reduce cost of risk, and ensure that the third-party’s interests are aligned—eliminating the economic drivers for finger-pointing.

The utilization of a captive insurance company for third-party business aligned to enterprise risk management may offer several benefits to an organization, principal amongst these are:

  • The reduction of cost of insurance for these risks
  • Developing an infrastructure which enables alignment and harmonization of interests between an organization and important stakeholders’ objectives
  • Access to any net revenue which may emerge as a function of underwriting profitability in these programs, and deploying that revenue towards advancing the company’s mission.

This approach to captive utilization applies to both affiliated/controlled portfolios and affiliated/not-controlled portfolios of risk and are common in the vendor, subcontractor, affiliated physicians, and joint venture space.


Entrepreneurialism refers to third- party business in the pursuit of new revenue streams. Where a third party needs to purchase insurances, the organization can provide a mechanism for that third party to purchase the required insurances from their captive insurance company. This does not necessarily improve its enterprise risk management platform, but the motivation is the pursuit of net revenues, which are expected to emerge through the underwriting profitability of the insurance program. Several examples of this captive insurance utilization model exist:

  • Health systems selling local/regional health insurance channeling plans
  • Big box retailers selling service contracts / extended warranties at the point of sale
  • Auto dealerships selling extended warranty programs
  • Associations selling companion insurances to their members
  • A host of other affinity type propositions are all opportunities for captive utilization for the pursuit of new revenue streams

Underlying our efforts to provide guidance to clients in the exploration of captive utilization opportunities is our commitment to provide analytical, not anecdotal, articulation of the value proposition in these initiatives.

Clients look to us to guide them through a complex process involving many internal and external stakeholders. We are tasked with not just articulating the how and the why of the insurance program, but also the ROI, the upside and downside of building an insurance business, and deliver to senior management an articulation of the initiative, which reads more like a business proposition than a discussion of the insurances. This is one of the many facets in which we realize our calling as the analytical broker.

About the author

Sean Rider


Sean Rider is Managing Director - Consulting and Development at Willis Global Captive Practice.

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