Commercial Insurance

Self Insurance, Captives And Other Alternative Risk Mechanisms

Traditionally, businesses have handled risk by transferring it to an insurance company through the purchase of an insurance policy, or alternatively, by retaining the risk and setting aside funds to meet expected losses through an arrangement known as "self insurance." A company might use a combination of traditional and self insurance. For instance, it might decide to establish a special self insurance fund to cover a substantial first layer, or amount, of any loss, with insurance coverage to pay for losses in excess of that layer.

Over the years, a number of alternatives to traditional commercial insurance have emerged to respond to fluctuations in the marketplace. Captives—a special type of insurance company set up by a parent company, trade association or group of companies to insure the risks of its owner or owners—emerged during the 1980s, when businesses had trouble obtaining some types of commercial insurance coverage. Today alternative risk transfer (ART) arrangements include self insurance, risk retention groups and risk purchasing groups, as well as more recent innovations such as catastrophe bonds and microinsurance.

The chart below shows the most popular domiciles for captives.

Leading Captive Domiciles, 2018-2019

    Number of captives
Rank Domicile 2018 2019
1 Bermuda 730 (1) 715
2 Cayman Islands 674 618
3 Vermont 580 585
4 Utah 441 (1) 435
5 Delaware 421 366
6 Barbados 276 294
7 North Carolina 246 (1) 235
8 Hawaii 231 231
9 Guernsey 209 (1) 199
10 Luxembourg 198 195
11 South Carolina 171 179
12 Nevada 182 (1) 174
13 Nevis 155 147
14 Tennessee 169 140
15 Anguilla 165 129
16 Arizona 124 128
17 Montana 128 (1) 123
18 District of Columbia 105 104
19 Isle of Man 103 102
20 Singapore 72 73
  Total, top 20 5,380 5,172
  Total, all captives 6,135 6,359

(1) Restated.

Source: Business Insurance (, March 2020.

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Alternative Risk Products: Capital Markets

Alternative risk transfer (ART) products, such as catastrophe bonds and weather derivatives, which transfer risk to investors via the capital markets, are also emerging as an alternative to traditional insurance and reinsurance products. One such product -- catastrophe bonds (risk-based securities sold through the capital markets) -- developed in the wake of Hurricanes Andrew and Iniki in 1992 and the Northridge earthquake in 1994. Tapping into the capital markets allows insurers to diversify their risk and expand the amount of insurance available to individuals and businesses in catastrophe prone areas.

Just as catastrophe bonds help insurers manage risk, another capital markets product, weather derivatives, can help such weather sensitive businesses as ski resorts, oil and propane gas distributors, and others that may experience large swings in annual sales due to weather conditions, to hedge their weather-related risk.

The chart below shows the types of industries that use weather risk products, based on a survey conducted by Pricewaterhouse Coopers for the Weather Risk Management Association (WRMA).

Participants In The 2008 Weather Risk Management Association Survey (1)


Participation by main line of business   Participation by location of respondent  
     Banking 1      Asia 1
     Energy 4      Europe 5
     Insurance 5      North America 6
     Other 2    
     Total  12      Total 12

(1) Based on companies responding to a survey conducted by PricewaterhouseCoopers for the Weather Risk Management Association; excludes Chicago Mercantile Exchange trades. 

Source: PricewaterhouseCoopers.