Captives seen as mechanisms to cover climate-related risks, access capacity

TUCSON, Arizona — As catastrophe losses rise due to increased climate-related events, captives can be used to manage the exposures better, experts say.

The alternative risk transfer vehicles can fund risk management programs, provide additional capacity and be used to purchase and administer nontraditional insurance and reinsurance programs such as parametric coverage, they said during sessions at the Captive Insurance Companies Association’s 2025 International Conference in March.

The increased frequency of catastrophe events, the higher concentration of people in urban areas and greater supply chain risks are increasing companies’ exposure to climate-related losses, said Taronne Tabucchi, San Francisco-based director, climate risk advisory, at Aon PLC.

“If we can quantify the risk, if we can have more detailed analytics and information, we can come up with action plans to push back against these rising losses, help mitigate them and manage them for the future,” she said.

The flexibility of captives means they can play a key role in those efforts, Ms. Tabucchi said.

Cummins Inc. uses its captive to compile data on its climate-related exposures and pay for risk management programs to reduce climate-related exposures, said Deyna Feng, Indianapolis-based director, captive programs, for the engine and power generation manufacturer.

“Our captive really plays a key role, not just in putting up a good insurance program globally, but also to fund the initiatives to manage long-term risks and help reduce future large claims or cat claims,” she said.

Captive owners considering using their captives to take on more climate-related risks should take several steps, said Daniel Mogan, Chicago-based director of finance and technology-risk management department at Hyatt Hotels Corp.

First, owners should work with their captive manager and outside counsel to assess regulatory or contractual requirements, such as lenders requiring rated insurers. Next, they should work with an actuary to review historical losses, set limits and calculate a premium charge. After obtaining the necessary approvals, they should draft and execute a policy with their captive manager and outside counsel, he said.

“Finally, we would account for the policy in our monthly financial statements and monitor its associated operating ratios to assess its financial performance, along with the need for any further modification to the coverage,” Mr. Mogan said.

To add insurance and reinsurance support to cover climate-related risks, companies can consider buying parametric coverage, said Dianna Nelson, Washington-based senior structurer-North America at Swiss Re Ltd.

The payout is based on an index-related measurement, such as the maximum one-minute sustained wind speed at an insured location, rather than the sometimes lengthy traditional claims process, she said.

Swiss Re always uses third-party data providers for the triggers, Ms. Nelson said.

“On the insurer side, we don’t have to worry about any kind of moral hazard, and on the insured side they don’t have to worry about us using some kind of internal black box,” she said.

In addition to property damage, the parametric payments can be used to pay expenses not typically covered by traditional property insurance, such as contingent business interruption, extra expenses, employee assistance expenses, mold and other exposures usually excluded or sublimited, Ms. Nelson said.

The policies can be structured with staggered triggers, where a percentage of the limit is paid at a lower wind speed, for example, and the full limit is paid at a higher speed, Ms. Nelson said.

Swiss Re parametric policyholders then have one year to submit a proof of loss, and any funds not used to pay agreed expenses are returned to the reinsurer, she said.

The quick payments and ability to cover excluded losses make parametric policies a valuable addition to insurance programs, said Steve McElhiney, Dallas-based partner, captives and alternative risk transfer solutions, at Augment Risk Services LLC.

“It’s not something that’s going to supplant the traditional program; it’s going to supplement it,” he said.

Large corporations, including oil companies and film studios, frequently buy parametric coverage through their captives, Mr. McElhiney said.

“If you have a captive, it’s the perfect fit. It’s the perfect mechanism to funnel those recoveries and have the total cost of risk captured in one spot,” he said.