Captive Insurers Step Up to Cover Emerging Risks

Emerging risks have become increasingly prevalent and difficult to predict in recent years. Cyber, climate change, pandemics, and artificial intelligence (AI) are among the most prominent, but many others have yet to surface on most companies' radars.

These risks share common challenges: data scarcity, regulatory uncertainty, rapid evolution, and the potential for large losses across multiple exposures. Understandably, many insurers have either declined to offer or withdrawn coverage for them.

This is where captive insurance can provide meaningful solutions.

"Captives provide for flexibility to manuscript coverages to meet these emerging risks where the commercial market is leaving gaps, allowing businesses to quickly respond to new exposures they face in a timely manner," said Jeremy Colombik, managing partner at Management Services International.

Andrew MacKay, vice president of captive management at Risk Management Advisors, added, "Captives also offer control and stability, providing greater control over claims handling, risk management, and capital deployment. A final key advantage of the captive market is access to reinsurance. Captives can access reinsurance markets directly, often securing better terms than the primary market."

Key Emerging Risks

Companies today face a range of emerging risks, including cyber, climate change, pandemics, and AI.

One of the biggest challenges with these risks is the lack of reliable historical data. For example, climate-related events and pandemics are inherently unpredictable, making them difficult to model.

"Captives are increasingly being leveraged to address a wide range of emerging risks, including cyber liability, climate-related exposures, coverage gaps in property due to capacity issues, and pandemic-related disruptions," said Peter Johnson, chief property and casualty actuary at Spring Consulting Group. "These risks are characterized by volatility, limited historical data, catastrophic potential, and evolving regulatory landscapes—all of which make them challenging for the traditional insurance market to underwrite."

Kevin Walters, communications director at the Tennessee Department of Commerce and Insurance, noted, "Some of the biggest challenges for everyone are the uncertainty in predicting losses and the increasing severity of events (i.e., climate change, pandemics, etc.), which lead to more catastrophic pricing models and make risk assessment more difficult as historical data becomes less reliable at predicting future events."

Cyber Risk

Cyber criminals have grown increasingly sophisticated, and the resulting attacks have become more damaging than ever. Given this volatility, captives are well-positioned to fill gaps left by commercial insurers.

"There's always been a strong demand for cyber risk coverage, but the shift to teleworking, largely triggered by COVID-19, has made this need even more prominent," said Stephanie Liu, captive insurance director at the Utah Insurance Department. "Although many workplaces are transitioning back to in-office operations, a significant number have retained teleworking schedules.

"In fact, some employers may find it challenging to attract and retain quality talent without offering flexible teleworking options. This widespread adoption of remote work dramatically increases prevalent cyber risks due to the heightened reliance on personal devices, home networks, and various remote access methods."

Mr. Colombik emphasized, "Captives are increasingly used to cover cyber liability. As cyber threats continue to grow in both frequency and severity, many commercial insurers are slow to offer a comprehensive or affordable solution. This is making captives an attractive option for businesses seeking manuscripted coverage that fits their needs and premium budgets."

Lori Gorman, deputy commissioner of the Captive Insurance Companies Division at the North Carolina Department of Insurance, added, "As cyber risk has been previously difficult to insure, with limited capacity, higher deductibles, and decreased limits in the traditional market space, companies have increasingly turned their captives to complement this coverage either with deductible reimbursement policies or quota share reinsurance arrangements as well as the captives participating in the excess layers.

"As the frequency of natural disasters and cyber attacks continues to rise, business interruption remains a critical risk, highlighting the value of customized risk management solutions offered by captives."

Climate Risk

Climate-related events have increased in both frequency and severity, driving property insurance rates sharply upward.

Utah has reported growing demand for climate risk coverage, particularly for wildfires. With insurers withdrawing from high-risk areas such as Utah and California's rural mountainsides, many homeowners have struggled to secure affordable coverage.

In response, Utah enacted legislation allowing association captives and reduced minimum capital requirements from $750,000 to $500,000 to make this option more accessible. While some homeowner associations may consider using this option, the law is primarily designed for association and business risks rather than broad homeowner property programs.

The state has also received interest from captive managers and owners exploring coverage for shared economy products and services—risks that often don't fit conventional insurance structures and lack historical data.

"Data suggests that climate change is playing a role in large catastrophic events such as the recent flooding in Texas, and its impact is a risk that many underwriters are hesitant to insure due to the lack of data," said Daniel Linton, director and consulting actuary at Pinnacle Actuarial Resources. "That's where captives come in because they can provide tailored coverage where it's often unavailable or unaffordable on the traditional market."

Pandemic Risk

The COVID-19 pandemic underscored the value of captives, as many traditional policies failed to respond when businesses filed business interruption claims. Some businesses with captives, however, were able to design coverage that responded to their specific needs.

"During the recent pandemic, many businesses found significant support through business interruption policies provided by their captive insurance companies," said Ms. Gorman. "While traditional insurance policies often excluded such coverage, captives offered tailored solutions that addressed their owners' specific needs."

AI Risk

AI adoption is transforming nearly every industry. While it offers efficiency and innovation, it also introduces liability and data privacy risks.

"This widespread adoption brings with it [a] multitude [of] legal and liability risks that require significantly more discussion and a deeper understanding," said Ms. Liu. "These risks are not always immediately apparent and can trigger unforeseen complications that we may not yet fully comprehend."

At present, AI remains more of an emerging exposure under consideration for captive solutions rather than a risk widely underwritten through captives.

Captive Structures

Captive structures typically used to address emerging risks include single-parent, group, and cell captives. The choice depends largely on organizational size, risk appetite, and capital availability.

Cell captives, with their lower capital requirements, have become especially popular.

"We see many organizations are exploring the captive market by forming a cell structure," said Mr. Walters. "Cells provide an opportunity to test if a captive is right for them without the large capital requirement that often comes with licensure.

"The requirements for cell structure formations in Tennessee allow these organizations to do that with relative ease. Updates to the formations of cells in recent years allow for a $100,000 capital requirement for the protected cell company."

Utah has also reported increased interest in sponsored captives, partly due to the reduced minimum capital requirement from $500,000 to $250,000.

Group captives, meanwhile, can be harder to establish.

"Emerging risks tend to be insured in a single-parent captive," said Mike Meehan, principal at Milliman. "While there are many group captive programs in existence, in my experience, they tend to insure the more traditional coverages such as workers compensation, general liability, auto liability, and professional liability."

Captive Benefits

Captives provide several advantages when insuring emerging risks, including tailored coverage, premium stability, and closer alignment with a company's risk profile.

"The captive industry has increasingly taken on the role of innovator in addressing emerging risks and new technologies," said Ms. Gorman. "The captive industry can be a nimble risk transfer alternative to the traditional markets.

"When using a captive insurance company to issue policies to their businesses and affiliated entities, owners can leverage their own loss development history and risk mitigation strategies to better maintain pricing stability and to develop customized policies that include benefits that may be too costly or generally excluded in the traditional marketplace."

Ms. Liu added, "Furthermore, a captive can serve as an excellent tool for filling gaps in coverage often left by traditional insurers. It provides crucial protection from the perils that conventional insurers may be unwilling or unable to serve adequately. This makes captives particularly valuable for addressing specialized risks or emerging exposures that might otherwise leave an organization vulnerable."

Mr. Linton noted, "Because the insured owns the captive, its policies can be written in such a way, either by clearer language or fewer exclusions, to respond more quickly. It also ensures better risk management as they have more skin in the game."

Risk Management

Effective risk management of emerging risks requires a structured approach that blends traditional techniques with the flexibility and loss-control measures captives provide.

"The best approach is for the C-suite and board of directors to continue to talk about risk," said Mr. Linton. "They need to keep the kind of risks that keep them up at night at the forefront of their minds and to continually test their resiliency against them."

Mr. Meehan added, "Understanding the sources of claims and what drives losses for an organization is the key to solid risk management. In our role as consulting actuaries, we are able to review the claims information, which can often lead to identifying trends in the data. That information can be particularly valuable to the risk managers as they implement risk management strategies to mitigate future losses."

Future Outlook

Looking ahead, captives are expected to continue innovating in response to emerging risks, while domiciles adapt their legislation and regulations accordingly.

T.J. Scherer, vice president at Spring Consulting Group, said he expects continued adoption of captives for emerging risks, particularly in property and general liability, where hard market conditions persist. He also noted that growing environmental, social, and governance pressures are prompting traditional insurers to restrict capacity in certain industries, making captives an attractive alternative.

Mr. Scherer further observed that advances in risk management are enabling better analysis and modeling of emerging risks using captive data, while regulatory scrutiny around cyber and operational resilience is driving the creation of new captive solutions.

Mr. Colombik added, "Captives have always been an integral part of emerging risks, and we don't see that slowing anytime soon. Captives have gained more attention than ever, and the industry is starting to better understand how they can be implemented. While they are not intended to replace the commercial market, I think together they can be used to tackle any emerging risks that lie ahead."

Ms. Gorman concluded, "The growth of the captive industry is expected to remain strong in 2025." As business owners' needs and risks evolve, captives will play an increasingly important role as an alternative to the commercial marketplace.

"The challenging traditional markets are also spurring interest in captive formations by more small-to-mid-size companies. To be well-positioned to address emerging risk in the coming year, captive professionals will continue to benefit from recruiting new talent to the industry and by building partnerships with trusted service providers for ongoing collaboration.

"Geopolitical risk is very likely to be an overriding risk impacting the insurance industry as we move forward under the next administration as well."