Reinsurance captive
A subsidiary created by a group to insure or reinsure its own risks rather than transferring them entirely to the market.
A reinsurance captive is an insurance or reinsurance company owned by an industrial or financial group, whose purpose is to carry all or part of its parent's risks rather than ceding them entirely to the market. The group insures its risks with a conventional insurer, the fronter, which then retrocedes those risks to the captive, which keeps the retention and reinsures itself in turn on the market for the peaks. The structure has several aims: financing predictable losses internally, smoothing results, accessing the reinsurance market directly, which is often cheaper than direct insurance, and optimizing cash management and taxation within applicable rules. In return, the captive requires capital to be set aside to cover the retained commitments and submission to prudential regulation, which reserves its use for groups of a certain size. The AlgoPolis paper on the uninsurability of the agentic model notes that the captive could become a mechanism of last resort for highly automated firms unable to transfer their risk to the conventional market, provided they immobilize massive reserves.
Textbook case: a global pharmaceutical group creates a Luxembourg captive to retain the first 20 million euros of annual cyber losses. Its fronting insurer issues local policies in each country, then immediately retrocedes the risk to the captive. The captive then buys market cover in excess of 20 million for peak losses. In a normal year the captive retains the losses and builds surplus; after a ransomware wave it draws on its market cover. The arrangement cuts the external premium by roughly 30 percent while giving the group direct visibility over its claims experience.
Reinsurance captive, captive reinsurance
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