5 Ways to Position Risk Capital as a Value Driver

5 Ways to Position Risk Capital as a Value Driver
May 19, 2025 10 mins

5 Ways to Position Risk Capital as a Value Driver

5 Ways to Build Conversation on Risk Capital as Value Driver

In today's uncertain economic climate, finance leaders must innovate beyond traditional financial metrics, managing risk capital through targeted risk strategies, holistic capital approaches and proactive stances toward emerging threats.

Key Takeaways
  1. Heightened volatility levels make new methods of attracting capital crucial for risk management.
  2. CFOs and risk buyers can help change the risk capital discussion by demonstrating how the right approach amplifies value beyond merely reducing the total cost of risk.
  3. These five strategies can help build key stakeholder conversations to harness the power of risk capital as a value driver for the business.

Table of Contents

  1. View Risk Management as a Value Driver

  2. Adopt a Value-Based Approach to Capital Allocation

  3. Utilize Alternative Risk Transfer Methods

  4. Harness the Power of Alternative Capital

  5. Foster a Culture of Innovation and Data-Driven Insight

With organizations facing increased volatility and risks becoming more interconnected, innovative ways to attract new capital as an alternative and complement to the traditional indemnity market, has become critically important. This need is underscored by findings from Aon's Multidimensional Growth Report, which reveal that 43 percent of chief financial officers (CFOs) cite global economic uncertainty as the primary challenge facing company growth.

A diversified risk capital approach offers a fresh perspective on risk management, focusing on amplifying value through strategic capital allocation and leveraging third-party balance sheets, rather than solely reducing costs. This can be accomplished through alternative, non-traditional sources of risk capital to help optimize a risk management program in a variety of ways:

  • Targeted Risk Management: Risk capital uses tailored solutions, including alternative risk transfer (ART) structures such as captives, structured reinsurance, cat bonds, parametric and facultative reinsurance, to configure risk transfer programs, optimize risk financing and protect against evolving threats.

    “For more volatile risks, an ART-structured solution can be effective. In cases of frequency risks, where transferring these risks yields diminishing returns, utilizing a captive arrangement makes sense,” says Ciaran Healy, a Global Captives leader at Aon.
  • Holistic Capital Strategies: Risk capital diversifies risk exposure and optimizes insurance capital to enhance resilience, adaptability and long-term sustainability.

    “CFOs and buyers should think about how they configure their risk program in similar terms to how they approach the configuration of investment portfolios and structuring debt, using analytics to optimize outcomes," adds Healy.

For CFOs and risk buyers, reshaping the conversation around risk capital is a foundational exercise for their organizations’ risk management programs. These five actionable strategies can help drive the risk capital conversation — with internal stakeholders, insurers and other capital providers — to support a more comprehensive approach to growth.

1. View Risk Management as a Value Driver

Encourage stakeholders to see risk management as a strategic asset that enhances business value. Shift the focus from merely reducing costs to how risk management can enhance corporate strategy and drive multidimensional growth.

  • This risk capital approach thinks about risk in a way that amplifies value through the strategic use of alternative, non-traditional risk transfer methods to manage volatility and unlock access to strategic sources of capital, rather than just reducing costs.
  • This is a shift from a transactional mindset, which focuses on total cost of risk. Non-traditional methods include insurance-linked securities, catastrophe bonds, captives, parametric, structured reinsurance, facultative reinsurance, structured solutions, fronting arrangements and sidecars.

“As business models have gotten more complex, traditional forms of risk transfer on their own cannot address the wide variety of risks across an organization,” says Cole Mayer, global head of Parametric at Aon. “Alternative risk transfer, such as parametric, can be tactically used to address exposures that were previously fully retained. These exposures can range from contingent risks and wide area damage business interruption to employee support after significant events. Alternative risk transfer can unlock capital previously spent on retaining these risks to further invest in growth.”

2. Adopt a Value-Based Approach to Capital Allocation

Encourage strategic discussions on capital allocation, highlighting how various sources — equity, debt and insurance — can achieve company goals. This shift from a transactional mindset to a value-based strategy highlights the importance of capital allocation and the benefits of utilizing the balance sheets of third parties, including insurers.

  • Organizations must be open-minded about all the sources of risk capital they have at their disposal for building their risk program and adopting a strategy that amplifies value rather than just reducing costs.
  • This aligns with the objective of increasing deal flow and executing successful transactions in the risk capital landscape.

3. Utilize Alternative Risk Transfer Methods

Educate stakeholders about the potential of alternative risk transfer methods, like parametric, captives, facultative reinsurance and structured solutions, to directly access capital that’s tailored to their risk appetite. For instance, captives can be used as a cost-saving mechanism but, also as a structure to retain risk and access other forms of risk capital to help optimize risk management and improve capital efficiency. This includes exploring industry-specific strategies to enhance marketing efforts, particularly in healthcare, the public sector, energy and construction.

Captives can act as the cornerstone of an overall risk capital strategy, allowing organizations to access diverse risk capital, allocate premium strategically, improve risk management practices and gather valuable data.

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Captives allow corporates to gather data, providing insights into how risk performs, which helps them finance risk better. Data also allows them to be innovative and solve for problems, which elevates risk as a strategic tool in which the boards take an interest.

Ciaran Healy
Global Captives Leader, Global Risk Consulting

Use of captives also allows firms to take control of their risk profiles and often leads to cost reductions. They can additionally serve as portals for accessing other ART products to optimize risk management strategies.

Parametric risk transfer provides organizations with a different way to strategically think about risk mitigation, especially in catastrophe-prone areas where capacity and terms are restricted and rates are adverse. Parametric offers payouts based on predetermined parameters (like specific weather measurements), rather than actual losses or claims. It also simplifies claims processing and enables rapid access to funds, enabling quicker recovery for policyholders.

“The value proposition of parametric risk transfer is to access risk transfer differently,” says Michael Gruetzmacher, head of Alternative Risk Transfer in North America at Aon. “With parametric triggers, claims are settled much quicker, and the proceeds are available much more broadly vs. traditional solutions.”

Insurance-linked securities are financial instruments linked directly to insurance risk, allowing investors to earn returns connected to the performance of insured events. Examples include catastrophe bonds and collateralized reinsurance, which provide capital to cover risks while enabling investors to diversify their portfolios.

  • Catastrophe (cat) bonds are a form of insurance-linked security where insurers transfer risk, usually from a catastrophe or natural disaster through a sponsor, typically a reinsurer, to investors. Aon is a leader in the cat bond market, with more than 50 percent market share of cat bonds placed globally.
  • If a specified catastrophe occurs, the bond pays out to cover claims, allowing insurers to stabilize their capital.
  • Investors receive interest until a triggering event occurs, at which point they may risk losing their principal. As a result, cat bonds are often issued on low-frequency, high-severity events. Cat bond investors tend to be asset managers, reinsurers and institutional investors.

Facultative reinsurance demand is growing, which reflects the need to manage increasing volatility in our complex risk environment. It helps insurers manage high-risk and complex exposures and enhances solvency by transferring select risks.

Structured solutions are an ART strategy that serve as a hybrid of other techniques, bringing together elements of risk retention, including captives and risk transfer, often via multi-year, loss-sensitive risk transfer approaches.

  • These solutions help insureds reallocate risk capital to where it is most needed (such as addressing catastrophic severity risk or as a strategy to fund high-frequency exposures). They also help organizations access risk transfer more strategically by removing themselves from year-to-year insurance pricing volatility.
  • Structured solutions are an effective way to involve investors in the insurance market without traditional underwriting processes.

At Aon, we collaborate with insurers and capital providers to identify real-world applications of alternative risk transfer. These focus on successful case studies that showcase effective strategies, thereby cutting through the noise of competing information in the market. Examples include:

  • Fronting Arrangements: This approach uses a licensed insurance carrier to provide coverage to entities that cannot write coverage. The business retains risk through a deductible and indemnity or transfers it to a captive insurer via a reinsurance agreement.
  • Sidecars: These are limited-purpose reinsurance companies offering alternative capital to insurers and reinsurers to reduce earnings and capital volatility developed in response to catastrophes.

4. Harness the Power of Alternative Capital

Discuss the advantages of integrating alternative capital sources, such as insurance-linked securities, into the company's risk management framework. Emphasize how these can provide diversification and stability, especially in volatile financial markets.

  • Alternative risk transfer methods enable companies to directly access much-needed capital, resulting in cost savings and customized risk management solutions. Alternative capital sources have grown significantly and are eager to get closer to the source of risk. That can lead to more efficient risk management solutions. For example, use of property cat bonds has grown significantly, nearly tripling since 2015.1
  • With captives specifically, discuss how a captive is a long-term strategic approach to risk financing versus traditional markets and external capital sources, which are typically annualized. “A captive demonstrates that you are investing in a long-term risk financing source. It is taking a more strategic approach to risk finance as a result,” adds Healy.
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A multi-pronged approach to accessing alternative risk transfer solutions maximizes access to capital in unique ways. This strategy then frees up other forms of dry powder for insureds, allowing the risk capital diversification to accrue substantial strategic benefits in times of uncertainty.

Michael Gruetzmacher
Head of Alternative Risk Transfer and Innovation, North America

5. Foster a Culture of Innovation and Data-Driven Insight

Promote a culture of continuous learning and innovation within the organization and emphasize the importance of using consistent language when discussing risk capital strategies. Encourage stakeholders to explore new risk management strategies and invest in education to build a comprehensive understanding of risk capital dynamics and risk maturity. This is particularly important where markets are less mature and significant work remains to raise awareness about the benefits of alternative risk solutions. “Quantifying your risk enhances your ability to transfer it, especially in the realm of cyber risk,” says Daniel VanderWoude, chief of staff for Aon's Risk Capital practice. “Unlike a century ago, when underwriters relied on judgment due to limited data, today’s risk assessment requires detailed modeling.”

  • An example is the cyber liability market, which has matured and stabilized over the past three years. Initially, cyber insurance faced challenges due to insufficient loss history and rapidly evolving threats, such as intellectual property theft and operational disruptions, which made insurers hesitant. Efforts to improve risk assessment include partnerships with startups to monitor vulnerabilities and internet traffic. These companies, similar to RMS with hurricane models, focus on cyber risks. By collecting data and gaining insights, businesses can better leverage alternative capital or risk transfer methods.
  • A captive has been historically an incubator for emerging risks, where underwriters don’t have enough data to cover them. Organizations can put the risk into a captive to start and then build an underwriting model based on the data that emerges over the long term.

“The optimal point for a buyer is when you can find the sweet spot between transfer and retention, understanding your risk through data and realizing the investment you’ve made in your risk management program,” adds Healy. “A captive is a good vehicle for that because it enables the organization to look at risk performance over a longer period of time.”

1 Facts + Statistics: Catastrophe bonds and other insurance-linked securities, III

Aon’s Thought Leaders
  • Michael Gruetzmacher
    Head of Alternative Risk Transfer and Innovation, North America
  • Ciaran Healy
    Global Captives Leader, Global Risk Consulting
  • Cole Mayer
    Global Head of Parametrics
  • Daniel VanderWoude
    Chief of Staff, Risk Capital

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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