The recent concentrated outbreak of natural disasters has caused catastrophic losses. Anne Marie Towle, Executive Vice President of JLT Insurance Management, said captives play an important role in helping organizations reduce the financial losses from catastrophes.

        It is increasingly common for California coastal companies to use captive insurance to cover part of their earthquake and windstorm losses. This is because commercial insurers often demand high deductibles—especially for catastrophe insurance, where deductible proportions are even higher; in parts of California, windstorm deductibles in reinsurance can be as high as 10%. This means that before receiving payment from insurers, loss-affected companies must first advance funds for post-disaster reconstruction. Through various appropriate means, captive insurers can provide first-layer loss compensation for large organizations facing disasters.

        Towle gave the example of a company purchasing USD 10 million of catastrophe insurance: the company can use a captive, a commercial insurance solution, or a combination of the two to provide first-layer loss coverage, and purchase USD 100 million of catastrophe excess-of-loss reinsurance. When reinsurance pricing is favorable, the captive may choose to participate in a small share of the catastrophe excess layer.

       In the long run, a captive-centered catastrophe insurance program can help the parent company obtain more comprehensive protection and smooth the company's financial losses caused by catastrophes.

Source: capitve.com