Aon | Professional Services Practice
Does Your Captive Have an Investment Strategy?
Release Date: March 2025Insurance captives are an important risk financing tool for professional service firms. Once an insurance captive is formed, it is crucial for long-term success to have a clear purpose and strategy around its investment portfolio. This Insight reviews the high level investment considerations required to optimize a captive’s investing strategy.
Key Takeaways
- Captive insurance companies are an important risk financing tool
-
When a professional service firm establishes a captive, it should consider the stages
in the lifecycle of a captive
- Intermediate and mature captives can benefit from investment consulting to optimize their investment portfolios
Stages of Captives
There are three stages in the lifecycle of insurance captives:
For a newly formed captive, priorities center around ensuring proper capitalization to meet regulatory and solvency requirements for the underwritten risks. Capital must be available to pay administrative costs and, most importantly, claims, which are dependent on the short tail or long tail nature of the underwritten risks.
At the startup stage, a portfolio of money market and cash investments is often the default investment strategy. At the beginning this may make sense but holding cash for long periods is generally a suboptimal investment strategy. Therefore, as the captive starts to grow, it must periodically review its investment portfolio structure and prepare for the next stage in its lifecycle.
After experiencing growth and underwriting cycles, the captive enters the intermediate stage. Intermediate captives have accumulated sufficient capital to meet regulatory requirements and have the flexibility to invest with purpose. Investment guidelines and policy statements are established, which then guide how investments are made and managed.
In the intermediate stage captives have a greater need for consultative investment services. A captive may consider having investment managers implement the established guidelines and look at alternative investment options outside of money market funds and interest-bearing accounts to help enhance yield and drive higher income. A captive that is accumulating capital can potentially finance risks that may not have been initially considered. Ultimately, by earning more on its investment portfolio, the captive can accumulate capital and this will eventually translate into lower costs and greater flexibility.
Mature captives have long histories and experience. They are in a capital position to effectively manage the risks originally set out by the parent company. Therefore, mature captives can consider alternative uses of their capital and be more flexible in risk appetite. When a captive is in a position of financial strength, initial investment goals relative to new or existing risks being underwritten can be reassessed. Updating investment guidelines, rebalancing an investment portfolio, and controlling investment management expenses may also be appropriate and can potentially result in improved financial results.
Optimizing Your Investment Strategy
Investment services for captive insurer investment portfolios include:
- Asset Allocation – Reviewing and/or establishing asset allocation targets, rebalancing policies, conducting stress tests.
- Portfolio Implementation – Investment manager due diligence and evaluation, creating and reviewing investment guidelines and policy statements, peer group analysis, market benchmark construction, fee benchmarking.
- Ongoing Evaluation – Ongoing manager due diligence, performance reporting and benchmarking, assistance with Board and Investment Committee meeting presentations
- Other Services – Custodian selection and fee reviews, fiduciary education, private investment pacing plans, and transition manager selection
Aon Investments USA Inc., the investment consulting group within Aon, has the capabilities and necessary expertise to assist captive insurance companies in optimizing their investment portfolios. The team has worked with numerous captives across the major North American and offshore domiciles and with captives at different stages, from startup to mature captives with more complex investing needs. If you have any comments or questions related to investment consulting, please contact Max Kotary or Mike Scotto.
Contact
The Professional Services Practice at Aon values your feedback. To discuss any of the topics raised in this article, please contact Connor Galvin or Henry Lim.
Senior Vice President and Executive Director
Radnor
View Articles by Connor Galvin
Henry Lim
Managing Director
Montreal
View Articles by Henry Lim
About Aon
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