How Captive Insurance Supports Energy Risk Strategies

As the energy sector confronts intensifying climate risks, capacity constraints, and rising insurance costs, captive insurance is emerging as a critical tool for managing exposures and building long-term resilience.

These risks have come into sharp focus as energy security, carbon footprints, and climate adaptation rise to the top of corporate agendas. At the same time, captive insurers continue to play a foundational role in covering traditional exposures such as property damage and liability.

The scale and pace of captive adoption are accelerating. Some energy companies now operate among the world's largest captives, reflecting the material balance sheet risks they are managing in-house.

Insuring Traditional Energy Risks

Captives are commonly used by energy companies to insure a range of core risks, including the following.

• Property damage. Coverage for physical damage to energy infrastructure, such as power plants, pipelines, and oil and gas facilities
• Liability. Protection against third-party claims arising from environmental damage, accidents, or other operational hazards
• Business interruption. Insurance for income loss and extra expenses resulting from unplanned outages due to events like natural disasters or equipment failure
• Supply chain disruption. Coverage for financial losses stemming from interruptions in the supply of critical inputs, such as fuel, materials, or components, caused by events like natural disasters, geopolitical issues, or transportation delays

"From a traditional perspective, property continues to be a very significant percentage premium spend for energy companies, even with market trend lines improving," said Julie Patel, Americas captive consulting leader at Marsh Captive Solutions. "Other areas of concern include wildfire liability and PFAS [perfluoroalkyl and polyfluoroalkyl substances] exclusions, which have impacted coverage availability, reduction in capacity, and increased pricing for energy companies.

"More recently, many companies are starting to think about AI [artificial intelligence] and the potential impact it could have as more companies are beginning to integrate AI into their day-to-day operations."

Another major challenge for energy companies is the reduction in excess liability capacity, according to Roy Hock, director of risk finance and casualty insurance at Valero Energy Corporation. He attributed this to excessive court verdicts prompting insurers to withdraw capacity.

Andrew Baillie, director of global insurance at The AES Corporation, also pointed to the shortage of natural hazard peril capacity for large renewable projects. As a result, he noted, many companies are assuming more of this risk themselves.

Responding to Emerging Climate and Technology Risks

In addition to traditional exposures, energy companies are increasingly turning to captive insurance to address new and evolving risks, many driven by climate change, extreme weather, and the shift to renewables. Common exposures include the following.

• Wind-related losses. Damage to power plants, transmission lines, and other infrastructure from high winds or hurricanes
• Flood and storm damage. Property loss, business interruption, and supply chain disruption from increasingly severe weather events
• Transmission and distribution line impacts. Damage to grid infrastructure from events like wildfires or ice storms
• Climate-related supply chain disruption. Interruptions driven by flooding, drought, or other climate-related events
• Equipment failure in renewables. Delays or breakdowns affecting wind turbines, solar panels, or storage systems
• Seepage and contamination. Environmental exposures specific to renewable technologies that may be excluded from commercial coverage
• Regulatory changes. Financial impacts of evolving environmental laws, permitting delays, and compliance burdens
• Emerging green technologies. Captives may be used to support unproven technologies like battery storage, offshore wind, and green hydrogen by collecting risk data and developing underwriting models.

"Battery storage continues to be an evolving technology, and there are some concerns among insurers about its resiliency and fire attributes, which they are continuing to monitor," said Mr. Baillie.

Choosing the Right Captive Insurance Structure

Several types of captive structures are available to energy companies, with the most common being single-parent, group, and cell captives.

According to Mr. Baillie, single-parent captives are well-suited for large energy companies with sufficient financial scale. These entities offer full control over underwriting, claims, and investment strategy.

For smaller or mid-sized firms, he noted, energy industry mutuals can offer an effective way to access necessary coverage.

Cell captives, including protected cell and segregated portfolio structures, are also gaining traction. These allow companies to isolate specific risks or projects within a captive framework without forming a stand-alone entity.

"At AES, we have a large portfolio of risks that we have consolidated," said Mr. Baillie. "We provide cover to our local businesses at a market level, and we buy reinsurance at a much higher level than they could sustain, on a consolidated basis."

Strategic Benefits of Captives in Energy

Using a captive to insure energy risks offers several strategic advantages.

• Cost savings. Captives can reduce overall insurance spend and free up capital for reinvestment in sustainability projects or infrastructure upgrades.
• Enhanced risk management. Companies gain greater control over risk identification, mitigation, and monitoring.
• Support for research and development. Captives can fund innovation in areas like renewable energy and emissions reduction.
• Boosting investor confidence. A captive demonstrates a long-term commitment to risk strategy and environmental, social, and governance alignment, which can help attract capital.

To meet lender or contractual requirements, companies may need to ensure their insurance programs meet certain credit ratings. This can be achieved by working with a rated fronting carrier or securing a rating for the captive itself from an agency like AM Best.

"The goal of the captive is to provide a cost advantaged risk transfer mechanism for its owners, but also be a viable and ongoing claims paying entity," said Mr. Hock. "The only real way to do that is by charging an appropriate risk transfer premium."

Benchmarking and Retention: Driving Informed Strategy

Captive owners rely on benchmarking and actuarial data to optimize their insurance programs and adjust to market trends.

"For established programs, we benchmark through data provided by our brokers and captive manager," said Mr. Hock. "Often, for new and emerging coverages, we look at the commercial market to help guide pricing, program structures and additional advisory services when offered.

"When a coverage is not available in the commercial market or is immature in the market, we will work with our internal stakeholders to produce a risk transfer program based on their needs and start benchmarking this if and when the commercial market develops."

Actuaries analyze historical loss data to project incurred but not reported claims and inflation-adjusted future liabilities. These insights guide premium setting and reserve strategy.

Analytics are also essential when determining retentions and limits. Companies must weigh their risk appetite, capital structure, and the availability of reinsurance.

"There are many different tools that can be used to assist the client in how much risk they should transfer to the commercial market versus how much they should retain and insure through their captive," said Ms. Patel. "It is important to have this discussion with the client throughout the year."

Generally, larger companies with strong credit ratings and lower capital costs are better positioned to retain more risk. Smaller companies may rely more heavily on risk transfer. Regular reviews ensure the structure remains aligned with business needs.

Case Studies: How Captives Solve Energy Risk Gaps

With growing adoption, captives are being used to solve increasingly complex risk challenges.

Ms. Patel shared one example involving a client facing a difficult property renewal. Faced with rising premiums and limited capacity, the client opted to raise its deductible.

"Based on feedback from the markets and rising premium rates, the client decided to raise their deductible and take on more risk," said Ms. Patel. "From a corporate standpoint, this wasn't a concern, but for the operating companies, it posed significant challenges.

"The solution was to have the captive write the deductible layer and issue a buy-down policy to the operating companies. This allowed the parent company to benefit from premium savings associated with a higher deductible, while the operating companies maintained their original deductible level."

Mr. Hock cited another example, noting that many years ago, the energy commercial property market experienced a challenge similar to what the excess liability market is facing today—namely, a withdrawal of capacity, albeit for different causes. Energy companies responded by forming an industry mutual through their captives.

"Ultimately, the commercial market recovered and today is strong and well-capitalized," he said. "The mutual still exists and provides arguably the lowest cost reinsurance for the member energy captives.

"In this instance, we were able to use our captives to create a cost-advantaged, stable risk transfer mechanism to support our business and industry at a time when the commercial market was unable to meet our needs."

The Road Ahead: Captives and Energy's Evolving Risks

Looking forward, the use of captive insurance in the energy sector is set to expand. As companies face rising climate-related and operational risks, captives offer the flexibility and strategic control to respond effectively.

By aligning risk financing with sustainability goals and investor expectations, captives will continue to serve as essential tools for energy companies navigating a fast-changing landscape.