Most conversations about captives stall in the same place. An adviser raises the idea, the client warms to it, and then someone runs the numbers. To stand up an entity that insures all its own risk takes more capital than most small and mid-sized businesses can commit. The conversation ends, and everyone returns to the ‘guaranteed cost’ renewal compromise that satisfies no one.
Which is a pity, because captives are not about all or nothing. Establishing an accomplished captive is a long-term journey which requires several steps over many years, the first of which being a good deal smaller than most advisers tend to believe.
The captive path broken down into stages
Consider how this works for an SME that can’t spare capital.
In the early years, the captive retains a modest share of its own risk – perhaps 20% – and partners with a reinsurer to carry the remainder. The business has a genuine captive, with ownership over their results, without having to fund the full exposure from day one. It begins to earn underwriting profit on the share it keeps, and more importantly, it begins to gather its own loss data and build understanding of their risk behaviour.
Over time, two things compound. Capital accumulates from retained profit, and data sharpens the picture of what the risk costs to carry. As both grow, the captive can take on a larger share – 30%, 50%, more – on its own timeline and its own terms. Some captives become accomplished enough that they begin offering capacity to risks beyond the parent company altogether, at which point the word “captive” rather understates what they have become.
For an intermediary, this reframes the conversation entirely. You are no longer asking a client to commit to making a giant leap backed up with a large chunk of capital. You are setting out a measured entry point with a clear path forward, alongside a reinsurer prepared to carry the balance of the risk while the client builds toward greater independence.
Why the scale of the partner matters
There is a reason the staged approach depends on the right kind of reinsurer, and it is not the obvious one.
Look at the profile of a young SME captive: lean operations, a small team, limited capital to absorb risk, and frequently a book of specialty or ‘difficult to place’ exposures that the standard market prices unfavourably. That profile is a familiar one to us, because it describes the cedents we work with every day. The small and developing carriers in our world run lean, keep their teams tight, and lean on technology to hold operating costs down. We operate in the collateralised market, posting capital in the US to write the risk, and we are at home in the mechanisms built for specialty business that does not fit the standard mould.
The point is not size for its own sake. It is that an SME captive taking its first 20% is not a rounding error to us, the way it might be to a larger reinsurer. We are built for this scale and this kind of risk, and the partner carrying the other 80 per cent understands lean risk takers because it works alongside them constantly. It is the difference between seeing a small captive as a small account and taking a closer look the potential a larger market would walk past.
That shared experience shows up in practice. It shows up in a willingness to structure for where a captive is today and where it is heading, rather than forcing it into a template designed for far larger balance sheets. It shows up in capacity that flexes as the captive matures and absorbs more. And it shows up in a partner content to step back as the client steps up, which is, after all, the driving force of the relationship.
The relationship this builds
A captive built this way is among the most durable relationships an intermediary can hold. A client shopping a ‘guaranteed cost’ policy is gone the moment a competitor undercuts the price. A client you have helped guide into a captive – one earning underwriting profit, building capital, and growing into more of its own risk each year – is woven into its own financial strategy, not merely buying a policy once a year. That is a relationship that compounds, in much the same way the captive does.
The barrier was never that captives do not suit SMEs. It was that the ‘all or nothing’ model asks for too much, too soon. Set that version aside, offer a client a sensible first step and a capacity partner suited to its scale, and the conversation that used to end early is one worth having in full.
Questions for advisers to think about:
- Which of your SME clients are absorbing losses informally on their balance sheet, or paying punitive ‘guaranteed cost’ premiums on specialty risk the standard market prices unfavourably?
- For those clients, is the barrier to a captive a lack of fit, or simply the assumption that they must fund 100 per cent of the risk from day one?
- Which clients have the loss history and risk discipline to make a credible start at a modest retention, and grow from there?
- If a client retained their first 20 per cent, is the capacity partner you have in mind built for that scale, or would a small captive be a rounding error to them?
- Does your current carrier relationship reward a client for maturing into more of its own risk over time, or treat each renewal as a fresh transaction?
At NPRe, carrying risk alongside lean, growing partners is what we are built for. If you are working with SME clients who could benefit from a staged path into a captive, we would welcome the conversation about how we might carry that risk with them through the years it takes to grow.