Captive Insurance and Cyber Risk: Delaware's Approach

As cyber risk continues to evolve in both complexity and severity, captive insurance companies are playing an increasingly strategic role in helping organizations manage these exposures. Domiciles are responding by adapting regulatory frameworks and supporting more flexible approaches to cyber-risk financing. To better understand how these trends are developing at the domicile level, Captive.com spoke with Stephen Taylor, director of captives at the Delaware Department of Insurance.

In this Q&A, Mr. Taylor shares his perspective on the types of cyber risks being placed into captive insurance companies, the structures companies are using to manage those risks, and how Delaware is positioning its captive program to support innovation in cyber coverage.

What types of cyber risks are organizations increasingly placing into captive insurance companies, and what challenges tend to arise when underwriting these exposures?

Cyber risks typically placed into Delaware captives include data breaches, ransomware and extortion, business interruption, and digital asset damage. While these represent common areas of coverage, policy terms often vary to reflect the specific risk profiles and needs of each organization. Delaware’s flexible statutes provide captives with the tools necessary to structure bespoke cyber coverage for their insureds.

Captive insurance has become an increasingly important tool for managing cyber risk, particularly as coverage has become more widely adopted and the risk itself continues to evolve. Captives enable organizations to take greater control over exposures that are volatile, rapidly changing, and not always addressed effectively by the commercial market. At the same time, challenges remain, including aggregation and systemic risk, technological developments such as artificial intelligence, privacy and regulatory considerations, and the growing interdependence of service providers within business supply chains.

From a captive domicile perspective, what makes Delaware particularly well positioned to support captives writing cyber risk?

Delaware's captive insurance program is well suited for captives providing cyber coverage. Regulators are responsive, comfortable with emerging risks, and take a collaborative approach to working with owners in structuring captive programs that align with business objectives. This facilitates the implementation of innovative cyber-insurance solutions, which often require a high degree of customization.

Additionally, the program is built upon Delaware's well-established corporate law framework, alongside its flexible captive insurance statutes. One clear example is the Series LLC statute, which provides business entities with an additional option for managing risk through captive insurance. This structure enables companies to isolate cyber risk within a dedicated series without forming a stand-alone captive, expanding access to captive solutions for smaller and midsized organizations

How are companies typically structuring their captives to address cyber risk, and what factors are driving those choices?

Insureds generally use single-parent or series captives to manage their cyber risks. Pure captives are typically utilized by larger organizations seeking greater control over underwriting and claims management. Series captives have become increasingly common for cyber risks, as they require lower capital commitments and are well suited for small-to-midsized companies. They also provide the ability to ring-fence cyber exposures from other risks of the insured.

What trends are you seeing in how captives are being used to address cyber risk, and how is that shaping the market going forward?

The commercial cyber-insurance market is stabilizing; however, coverage remains costly, and policies often leave gaps. For example, systemic cyber risk is prompting insurers to limit exposure, as they grow increasingly cautious about cloud outages, widespread software vulnerabilities, and critical infrastructure attacks. This has led to sublimits, coinsurance requirements, and exclusions for systemic events.

Captives are being used more strategically—not because the market is broken, but because companies are seeking greater control over pricing and coverage. They can enhance control, support cost management, and provide more comprehensive or specialized protection. Captive insurance may also serve as a bridge to reinsurance, improving pricing and capacity for cyber programs, as reinsurers are often more willing to underwrite cyber risk and may offer more favorable terms than primary insurers.

Cyber risk is expected to continue increasing, with demand for coverage rising alongside it. While ransomware frequency has declined, severity remains elevated due to data exfiltration, double extortion, and supply chain vulnerabilities. Artificial intelligence is likely to accelerate these trends through more sophisticated phishing, deepfake-enabled fraud, and automated vulnerability exploitation. In this environment, captives can help fund incident response and address coverage gaps, such as system failure and reputational harm. They may also provide flexibility to cover emerging artificial intelligence-related risks that commercial markets may be slower to insure. Additionally, captives enable organizations to integrate cyber risk more fully into their enterprise risk management programs.

One area Delaware is exploring is the potential role of captive insurance in addressing cyber risks associated with operational technology and industrial control systems. These exposures are common in sectors such as power utilities, manufacturing, water systems, and transportation, where cyber incidents can result in physical consequences and differ significantly from traditional information technology-related risks.