Reduced insurance spend and retention of underwriting profits. Retaining risk in a captive that would otherwise be transferred to the insurance market can reduce premiums and prove to be more economical over time. This is particularly true of well performing risks, allowing underwriting profits that would normally be lost to be retained. Improved cash flow. Monies that would have been paid out in premiums can be retained within the group and are accessible by the organisation and generate investment income. Receive ceding commission. This is the fee paid by a reinsurance company to an insurance company to cover administration costs, underwriting and business acquisition expenses.

In one case, an organisation saved more than NZ$2m in five years.

• Situation: A large New Zealand-based company faced the necessity of adopting higher deductibles and lower insurance limits due to market capacity constraints for their risks.

• Intervention: In 2017, they established their own insurance company (captive) with minimal capitalisation required. The captive was designed to retain a ‘primary’ layer of risk above the deductible and to be reinsured above that point. In later renewals, a co-insurance arrangement was introduced, with the captive retaining a 5% share of the risk above the primary/deductibles.

• Outcome: Access to the global reinsurance market allows direct participation by reinsurers behind the captive, rather than through a fronting insurer (e.g., NZI, QBE, Vero, etc.). This shift gives the business control and enables direct access to reinsurers, bypassing insurers who previously managed reinsurance purchases and earned related commissions. The captive purchases reinsurance, effectively eliminating frictional costs. Through co-insurance, the captive can displace excessively expensive capacity. This process tightens commercial insurance requirements and fosters competition. The captive gains increased control over claims management. As capital accumulates, the captive can underwrite non-traditional risks, providing risk financing for scenarios like reputational risk, product recalls, loss of license, disease outbreaks, pandemics, reduced yields, etc.

Captives come in all shapes and sizes but primarily fall into the following three categories: Single-parent captive, Cell captives, and Group captive. The optimal captive is one that best addresses an organisation’s financial, risk management and strategic objectives. For example, A single-parent, wholly owned captive is set up and operated by a single owner or company to insure its own risk and the risk of its subsidiaries. It is a wholly owned subsidiary of the insured and is typically utilised by companies that retain significant risk.

A large New Zealand-based company faced the necessity of adopting higher deductibles and lower insurance limits due to market capacity constraints for their risks. They established their own insurance company (captive) with minimal capitalisation required. The captive was designed to retain a ‘primary’ layer of risk above the deductible and to be reinsured above that point. The captive has already built sufficient surplus to look at retain a higher share in the upcoming renewal. The value of the captive to the client includes access to the global reinsurance market, allowing direct participation by reinsurers behind the captive rather than through a fronting insurer (e.g., NZI, QBE, Vero, etc.). This shift gives the business control and enables direct access to reinsurers, bypassing insurers who previously managed reinsurance purchases and earned related commissions. The captive purchases reinsurance, effectively eliminating frictional costs.

The domicile selection process is a crucial component of a captive feasibility process. Lockton manages captives and has established relationships in all the major domiciles. Key domiciles in the Asia Pacific region include New Zealand, the Cook Islands, and Singapore.

• On-the-ground with global connections: A world of difference. Local presence with global reach: Our regional captives leader is based in New Zealand, offering organisations access to global experts located in key hubs such as Kansas City, New York, Los Angeles, Dallas, and London.

• Specialist team: Our collaborative team comprises finance, accounting, credit, and insurance professionals dedicated to designing and implementing tailored insurance solutions that meet our clients’ specific needs.

• Entrepreneurial spirit: With extensive market knowledge and experience, we excel in creating, identifying, and placing unique and market-leading risks in Australia and New Zealand, whether through captive solutions or other innovative approaches.

• Personal commitment: Our closely-knit team of consultants, with years of collective experience, is dedicated to delivering exceptional service, always striving to surpass client expectations.

• Strong culture and team: With a global client retention rate exceeding 97%, we demonstrate our commitment to consistently delivering outstanding results. You can trust us to exceed your expectations.

• Transparency: As a privately-owned company, we prioritise transparency and place our clients at the forefront of everything we do. We are upfront about our earnings and remain independent in our decision-making process.