How Captives are Reshaping Climate Risk Management

‍Climate Risk is Now a Core Business Issue

For businesses across industries facing climate-driven threats and rising insurance costs, the risk is no longer a hypothetical concern—it’s a balance sheet issue. The frequency and severity of climate-related disasters have intensified, with insured catastrophe losses exceeding $100 billion annually for five consecutive years, and over $135 billion in 2024 alone. Insurers are pulling back from high-risk markets, introducing restrictive exclusions and pricing climate risk at levels that are increasingly unsustainable.

In response, companies are turning to captive insurance to gain control over their risk financing. Captives offer an alternative to the volatility of the commercial market, allowing businesses to structure coverage around their specific exposures, access reinsurance at institutional rates, and retain underwriting profits with good performance. But the trend towards captives is about more than insurance—it’s about capital efficiency, risk-adjusted decision-making, and long-term stability.

The Market Reality: Why Businesses Are Seeking Alternative Risk Transfer

The commercial insurance market operates on cycles, and over the last several years, it has seen an extended hard market. The property and casualty sector has seen four consecutive years of rate increases, driven by rising climate losses and tighter reinsurance capacity. Key trends include:

• Withdrawal from high-risk regions – Major insurers have exited entire states like California and Florida, citing unmanageable wildfire and hurricane exposures.
• Rate inflation – In many disaster-prone areas, Commercial property insurance premiums have risen by over 50%.‍
• Exclusions for climate perils – Flood, wildfire, and storm-related exclusions are making policies less comprehensive.‍
• Reinsurance constraints – Global reinsurance capacity has tightened, pushing primary insurers to pass higher costs onto policyholders.

These trends mean increasing cost volatility, reduced coverage options, and heightened counterparty risk when relying on traditional carriers. Captive insurance presents a direct path to mitigating these risks with greater precision.

How Businesses Are Leveraging Captives for Climate Risk Management

Cost Containment and Capital Efficiency

A core advantage of captives is their ability to stabilize insurance costs over time. Instead of absorbing unpredictable premium hikes from the traditional market, a captive enables a company to:

• Smooth volatility over time by setting its own premium structure based on actuarial analysis tuned to their own performance on risk.
• Reduce leakage by capturing underwriting profits that would otherwise go to a third-party insurer.
• Optimize capital allocation by investing retained earnings from the captive into risk mitigation projects, such as infrastructure improvements, technology implementation, and employee training.

Filling Gaps Left by the Commercial Market

As insurers impose new exclusions, captives give businesses the flexibility to design coverage attuned to their actual risk profile. This is particularly valuable for industries where traditional policies are no longer sufficient or where premiums are becoming prohibitively expensive. Common examples include: 

• Real estate developers leverage captives to cover high-value properties or high-risk locations where commercial insurers are withdrawing.
• Logistics and fleet operators structure captives to fund self-insured retention layers for storm damage, cyber risk from new technology implementations, and supply chain disruptions.
• Manufacturers leverage captives to cover business interruption risks linked to extreme weather events, equipment purchases, and repairs. 
• Schools & camps leverage captives to cover general liability for bodily injury and sexual abuse risk.

By customizing coverage, businesses avoid the inefficiencies of paying for unnecessary protections while remaining exposed to critical risks.

Accessing Reinsurance Markets for Climate Exposure

A well-structured captive provides direct access to global reinsurance markets, allowing for greater pricing leverage and improved risk transfer efficiency. Instead of relying on a commercial insurer to act as an intermediary, companies can:

• Negotiate more favorable reinsurance terms by assuming first-dollar risk, demonstrating commitment to loss control, and creating a more attractive risk profile for reinsurers.
• Pool multiple risks into a captive entity to diversify exposures, enhance risk spread, and achieve more stable reinsurance pricing.
• Use parametric reinsurance structures, which trigger payouts based on predefined climate metrics such as wind speeds or precipitation levels, ensuring rapid recovery.

This strategic use of reinsurance enables businesses to maintain liquidity and financial resilience, even in the face of climate-driven disruptions.

Illustrative Examples: How Industries Could Leverage Captives for Climate Risks

Commercial Real Estate: Addressing Wildfire and Flood Exposures

In regions prone to wildfires and flooding, real estate firms may find commercial insurers unwilling to provide adequate coverage or premiums priced at unsustainable levels. A captive could allow firms to:

• Replace or supplement traditional property insurance for high-risk assets.
• Establish a funding mechanism for wildfire mitigation and flood defenses.
• Achieve long-term cost predictability while meeting lender and investor requirements.

Logistics and Transportation: Managing Business Interruption from Hurricanes 

Logistics providers operating in hurricane-prone regions face frequent disruptions, leading to costly downtime and supply chain issues. By utilizing a captive, a company could:

• Provide business interruption coverage tailored to its geographic footprint.
• Secure reinsurance backing for catastrophic hurricane events.
• Stabilize annual insurance costs while maintaining operational continuity.

Embedded Insurance: Expanding Coverage for Climate Risk

Companies offering embedded insurance in industries such as home services, travel, hospitality, or mobility often face exclusions for climate-related risks from traditional insurers. A captive could enable them to:

• Develop customized policies that include climate risk coverage tailored to their customers.
• Stabilizing a portion of capacity to reduce reliance on an increasingly volatile market.
• Retain premium profits that would otherwise go to external carriers.
• Strengthen investor confidence by demonstrating proactive risk management.

ESG Implications: Aligning Captives with Corporate Sustainability Goals

For companies with Environmental, Social, and Governance (ESG) commitments, captives provide a mechanism to actively manage climate risks rather than relying on insurers whose incentives may not align with long-term sustainability objectives.

• Funding climate adaptation initiatives – Captives allow businesses to invest surplus reserves into resiliency measures that directly reduce risk exposure and improve insurability. This includes flood defenses, wildfire prevention, retrofitting infrastructure for extreme weather resilience, and supporting carbon reduction initiatives that align with long-term sustainability strategies.
• Improving governance and risk transparency – Captives create a centralized mechanism for identifying, assessing, and managing climate-related financial risks. By maintaining detailed risk data, claims histories, and financial reserves, businesses using captives enhance accountability, improve compliance with evolving regulatory standards, and provide greater visibility into long-term risk exposure for stakeholders and investors.
• Meeting investor and regulatory expectations – As ESG reporting standards evolve, captives provide a structured framework for demonstrating proactive climate risk management. Companies with captives can better quantify climate-related financial exposures, align with investor demands for transparency, and comply with emerging regulations on climate disclosures, reinforcing their financial stability and credibility.

Institutional investors increasingly favor companies with strong risk management frameworks. A captive provides a demonstrable way to manage climate-related financial exposures, reinforcing corporate resilience and value creation.

Conclusion: Taking Control of Climate Risk Financing

The traditional insurance market is failing to provide businesses with sustainable, predictable solutions for climate risk. Captive insurance offers a financially sound, data-driven approach to managing these exposures with greater control, consistency, and efficiency.

Strategic Actions to Consider:

1. Assess historical and potential future exposure to climate-driven insurance volatility.
2. Evaluate the feasibility of a captive to address specific coverage gaps and the rising cost of traditional insurance premiums.
3. Consider options in the reinsurance markets to diversify risk and for protection against catastrophic loss.
4. Engage with experts to discuss the captive structure best aligned with financial and operational objectives.

For businesses looking to future-proof their operations, captives are no longer a niche alternative—they are a core financial strategy for managing climate risk in an era of increasing uncertainty.