Aon  |  Financial Institutions Practice
Captive Insurance Solutions for Financial Institutions

Captive usage is evolving. Market conditions are prompting more discussions around alternative risk financing options as many financial institutions see their risk transfer costs surge.

For financial institutions, reducing the total cost of risk (TCOR) is imperative. As specialty vehicles designed to assist firms to manage self-insurance of all or a portion of their own risk, captives and captive-type solutions can enable firms to manage their TCOR through self-insured retentions, and secure coverage which is difficult to obtain from the insurance market.

By providing an alternative to commercial insurance, captives enable firms to address gaps in their coverage and insulate from market volatility. Retaining risk via a large deductible or self-insurance program is a formalized financial structure, enabling firms to control losses and prepare for the future by developing statistical analyses to help secure terms and pricing for coverage.

Benefits of captives for financial institutions:


  • Provides insurance coverage in fluctuating insurance cycles = price stabilization
  • Reduces the dependency on commercial markets
  • Direct access to reinsurance markets
  • Cures market dislocation due to "best terms" requirement on quota-share placements

Structure Retained Risk Strategy

  • Great structure and control over risk management and financing
  • Continuity and breadth of insurance coverage
  • Reduced volatility on insurance spend
  • Optimize cost benefit in retention versus transfer
  • Ring-fence risk funding

Risk Management and Control

  • Influence program design and cost
  • Central access to loss data and reserving practice
  • Claims handling control - image preservation, avoidance of legal precedents, out-of-court settlement, negative publicity management, damage limitation.
  • As a separate subsidiary of the business, focuses senior management attention on risk

Direct Financial Benefit

  • Wedge in market negotiations
  • Captures insurer profits
  • Potential State tax benefit (permanent)
  • Potential acceleration of tax deductions
  • Global cash management

Risk retention options: balance sheet or captives?

Assessing the innate characteristics of different risk retention options helps financial institutions make an informed decision which is best aligned to the firm’s needs and objectives.

Balance sheet

  • Pay losses through internal cash flows
  • Internal accounting process
  • No direct administrative costs
  • Reliance on internal controls to ensure availability of sufficient funds
  • Direct access to money saved when favorable loss experience
  • No direct access to reinsurance
  • Internal data collection and analysis
  • Market dictates coverage and conditions
  • Limited leverage for negotiations
  • Difficult to transfer to the commercial market
  • Long-term strategizing depends on informal internal process

Captive insurance program

  • Pay claims from funds in captive (premiums)
  • Formalized accounting process
  • Captive administrative costs
  • Compliance with domicile regulations, including minimum statutory capital and surplus
  • Controlled access of parent to captive funds
  • Access to reinsurance
  • Robust platform of underwriting data
  • Scope to create tailored captive policies
  • More options to leverage in market negotiations
  • More appetite in the commercial market
  • Pooling of risks and multiyear strategy: smoothing and portfolio effects, increased risk tolerance

As the global business environment continues to change, existing and emerging risks will continue to demand innovative solutions.

Captives can enable firms to take a responsive and flexible approach to risk retention and engaging with a specialist consultancy and management service will ensure your risk management strategy remains effective and efficient.