Structured insurance is a powerful tool for managing a company’s risk retention, especially when those risk retention levels - typically in the form of deductibles - are quite high. While high deductibles may at times make sense at the corporate level, as they can lower overall premiums paid to the insurance market, this isn’t always true for individual subsidiaries. For these smaller entities, the same (high) deductible might be unsustainable due to their specific financial situation.
To bridge this gap, companies can implement a self-insurance program across the entire organization, offering protection for those “too high to handle” deductibles within their existing risk transfer program. The classic approach to this is through the introduction of a captive, which is a specialized (re)insurance company created by businesses to insure their own risks. But what if a captive isn’t available, or isn’t suitable (at least in the short term) for various reasons?
Structured insurance can step in to offer a tailor-made mix of self-insurance and risk transfer through a structured insurance contract with a commercial insurer. A popular solution is the so-called “virtual captive,” a structured insurance agreement where an agreed portion of risk is self-financed over multiple years, using a combination of annual premiums and additional premiums based on loss experience. The agreement also includes that the insurer assumes risk beyond the self-insured portion.
Virtual captives are particularly useful in international programs, where these complexities arise. In contrast, a single-country or single-policy insurance program often relies on simpler deductibles to manage risk retention efficiently.
In essence, structured insurance offers new options, allowing businesses to fine-tune their risk retention strategies in a way that aligns with both corporate goals and the realities of subsidiary entities.
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