Beyond the cycle: how to communicate captive value to the board in a soft market

Historically, captives have been treated somewhat like a muscle, exercised intensively when insurance markets harden, but allowed to idle when conditions soften. Yet the most effective captive owners continue to develop and strengthen their programmes throughout the cycle, ensuring they are ready when market conditions inevitably turn. 

Whether you are defending an existing captive, advocating for a new one or exploring the upcoming UK captive regime, Airmic members should shift the boardroom conversation away from short-term premium savings and toward long-term strategic control. 

Stop the "premium leakage" on predictable risks 

The most foundational value of a captive holds true regardless of the market cycle: reducing premium leakage for attritional, predictable risks. 

Take a large retail business with regular liability claims. Depending on your scale, you can analytically predict what those frequency claims will cost each year. When you buy commercial insurance for these predictable risks, you aren't just paying for the risk transfer; you're paying for the underwriter's expected losses, their cost of capital and their profit margin.

By placing these risks into a captive, you charge the correct technical premium without the commercial markup. If claims come in lower than predicted at the end of the year, that profit stays within the group rather than leaking into the commercial market. 

In a soft market, commercial rates might drop, but an insurer is always going to charge a profit margin. A captive ensures you take a long-term view and grow capital over time, smoothing the volatility of this underwriting profitability and giving yourself the best chance to retain that cash over time.

Use the captive as a fulcrum for arbitrage

A captive shouldn’t just be a bucket for risk; it should act as a gateway to the broader reinsurance market. This is where arbitrage comes into play. 

By setting up your captive in the middle of your risk transfer strategy, it acts as a fulcrum, allowing you to balance and arbitrage the differences between the direct and reinsurance marketplaces. 

Often, companies focus on accessing primary direct markets through long-term relationships; however those primary markets often purchase reinsurance on the same risk – you can access that reinsurance to get a better deal in the reinsurance space.

A captive allows you to control your insurance and reinsurance strategy. You can maintain your primary market relationships on the front end, while using a specialised broker to access wholesale reinsurance capacity on the back end. 

This creates competitive tension, segregates capacity and diversifies your capital sources. Ultimately, reinsurance arbitrage isn't just about price; it's about taking control of your total cost of risk and designing more innovative, stable coverage structures.

Align risk with corporate finance 

A compelling way to bridge the communication gap with the board is to draw a parallel between the risk manager and the corporate treasurer. While their daily remits differ, both functions share a common objective: ensuring the organisation has access to capital when it needs it most. 

A treasurer achieves this by securing reliable, long-term sources of liquidity and funding, often through multi-year revolving credit facilities and other committed financing arrangements. The goal is not simply to finance the next twelve months, but to create certainty and resilience through changing economic conditions. Yet in the insurance world, organisations often continue to access capital, in the form of risk transfer capacity, on a strictly annual basis.

When you utilise a captive, you align risk management with your organisation’s philosophy to capital financing. A captive allows you to absorb the peaks and troughs of both your own risk profile and the insurance cycle by taking a multi-year approach. It gives underwriters the predictability they need to offer better pricing, while providing the corporate board with the financial consistency they crave.

A soft market shouldn't mean pausing your captive strategy; it’s an opportunity to optimise it. By changing the narrative from cheap premiums to capital efficiency, arbitrage and long-term control, you ensure your board sees the captive for what it truly is: a strategic, all-weather financial asset. 

Graham McCarthy is a Partner in Specialty Broking at McGill and Partners.