Written in collaboration with Mary Carey, a member of The Blog team.
In a rapidly evolving risk landscape, businesses are increasingly encountering threats that traditional insurance models fail to address adequately. Certain risks, such as cyber threats, pandemic disruptions, reputational harm, supply chain failures, and Environmental, Social and Governance (ESG) liabilities are becoming more difficult and costly to insure. They pose unique challenges that call for innovative solutions.
In this blog, we explore some of the reasons that could explain why these risks are often excluded by conventional insurers and how captives can effectively bridge the coverage gaps.
Risk management is a major challenge in a changing world
On 15 January 2025, the World Economic Forum issued a report titled ‘Global Risks 2025: A world of growing divisions’. In his preface, Saadia Zahidi, Managing Director of the World Economic Forum, said, “The multi-decade structural forces highlighted in last year’s Global Risks Report–technological acceleration, geostrategic shifts, climate change and demographic bifurcation–and the interactions they have with each other, have continued their march onwards.”
The report went out to explain how, “The current geopolitical climate, following Russia’s invasion of Ukraine and with wars raging in the Middle East and in Sudan, makes it nearly impossible not to think about such events when assessing the one global risk expected to present a material crisis in 2025: close to one-quarter of survey respondents (23%) selected State-based armed conflict (proxy wars, civil wars, coups, terrorism, etc.) as the top risk for 2025. Compared with last year, this risk has climbed from #8 to #1 in the rankings. Geopolitical tensions are also associated with the rising risk of geoeconomic confrontation (sanctions, tariffs, investment screening), ranking #3, which is also driven by inequality, societal polarisation and other factors.”
It’s worth noting that this statement was made in mid-January of this year, and that events have certainly continued ‘on the march’ ever since. A quick glance at the news, whether in print or online, makes that crystal clear.
The world is in constant motion, with changes unfolding at an unprecedented pace, both technologically and regulatory. This evolving landscape presents new challenges for companies and their leaders as they strive to ensure long-term sustainability and deliver the short-time value shareholders expect.
As a result, anticipating future risks, analysing their impact, and identifying mitigation actions have become critical priorities for corporate governance bodies. Take, for example, a multinational tech company. Not only must it keep pace with rapid technological advancements, but it must also navigate the complexities of international regulations. In 2025, such a company could face increasing pressure from geopolitical tensions, including ongoing conflicts in various regions.
At the same time, businesses must manage existing risks by adapting their risk management policies to account for evolving threats. Consider pension funding, an increasingly pressing issue in Luxembourg and across Europe. Traditionally a state concern, it is beginning to take root in the corporate sphere, with the emergence of ‘Employee Benefits’ risks in European captives.
What is clear is that leaders must proactively identify tomorrow’s risks, whether emerging or not, set guiding policies and coherent actions to protect their organisations against them.
Understanding hard-to-place risks
Hard-to-place risks are those that are difficult to model, price, or transfer due to their low-frequency, high-severity nature, a lack of reliable historical data, or their systemic and intangible characteristics. Traditional (re)insurers are often reluctant to cover such risks because of their unpredictable nature and the difficulty in assessing their financial and regulatory impact.
In fact, for instance, cyber threats are complex and constantly evolving, making it difficult for insurers to accurately measure the potential impact. Similarly, pandemics can cause widespread, simultaneous, and correlated claims, overwhelming the capacity of traditional insurers. Reputational harm, supply chain disruptions, and ESG liabilities involve subjective assessments and long-term consequences, making them challenging to quantify and insure within standard policies.
Consequently, these risks are either excluded or heavily sub-limited in traditional insurance programmes, leaving companies to absorb the financial impact on their own balance sheets.
Climate risks
Climate change topped the table of risks for insurers in Luxembourg in 2023, the most recent year they were surveyed. Firstly, while climate risks have long been recognised, their frequency and severity continue to increase as global temperatures rise. The climate evolves, to the point that the issue of financing “Natural Catastrophe” risks will need to be addressed in the coming years.
One recent example is the State of California’s insurance crisis, where many homeowners lost their coverage due to extreme weather before losing their homes. But the impact of climate change extends beyond property insurance. Rising temperatures and environmental shifts are also affecting life, health, and long-term insurance liabilities, as higher mortality and morbidity rates become a growing concern. Even in well-prepared regions, increasing heat stress poses significant challenges.
This raises a critical question: Will these risks remain insurable in the future—at an acceptable price and coverage conditions—given the gradual disappearance of the randomness that prevails in the very definition of insurance? Companies will certainly need to anticipate these risks, find solutions to cover them and comply with the resulting regulations.
Environmental risks
Environmental risks have been extensively studied, and companies have been navigating a rapidly changing regulatory landscape for several years. In the medium term, new risks related to climate change could emerge, posing additional challenges.
Physical risks, such as rising sea levels, increasing temperatures, and soil degradation, could directly impact production units. Therefore, companies may need to consider relocating their operations to areas deemed less risky. Similarly, climate-related conflicts could also force multinationals to rethink their geographic footprint, further complicating long-term strategic planning.
While relocation may entail significant costs, these expenses could still be more manageable and measurable compared to the unpredictable financial impact of escalating climate hazards.
IT and cybersecurity risks
In the 2023 Global Banana Skins report, released in 2024, cybercrime was identified as the top threat to insurers, followed by regulation and climate change.
The emergence of information communication risks poses a real threat for both IT security managers and (re)insurers. As the world becomes increasingly digital, risks around ethics and data confidentiality, for instance, are intensifying. These risks can impact both corporate and public institutions. At the same time, new, unidentified risks continue to emerge as artificial intelligence and task automation gain momentum.
As these technologies become more embedded in everyday life, they introduce new risks, such as algorithmic biases and the creation of corrupted content. These technical failures could lead to significant damages, raising questions about the extent to which insurance coverage can address these risks. Thus, companies will have to adapt quickly to emerging technologies while minimising the risks associated with early adoption or weak security measures.
How captives fill coverage gaps
Captives—whether structured as insurance or reinsurance companies—provide businesses with a flexible and regulated framework to insure against non-traditional risks. In this regard, unlike a traditional insurance company, an insurance captive can be tailored to address the specific needs of the parent company or its affiliates. They do so by offering customised coverage for unique and emerging threats while enhancing claims management efficiency.
On the other hand, a reinsurance captive, commonly used in regulated sectors such as financial services, operates behind a fronting insurer. It reinsures layers of risk, allowing the parent company to access internal capital while maintaining compliance with regulatory or operational constraints. This bespoke approach enables businesses to manage risks more effectively and ensure comprehensive protection.
Additionally, captives can drive innovation in risk management by integrating solutions such as parametric triggers or deductible buy-downs to cover otherwise uninsurable losses, aligning with the company’s overall risk appetite.
Regulatory and compliance considerations
Operating a captive requires navigating a complex regulatory and compliance landscape. Frameworks like Solvency II, IFRS 17 (to some extent), and various tax structures significantly influence how captives are structured and managed.
- Solvency II, an EU’s prudential framework for insurers, sets strict rules and requirements in terms of capital charge for insurance companies through proportionality measures. The upcoming 2026 Solvency II update introduces further simplifications tailored to captives, easing compliance burdens.
- IFRS 17, which defines the accounting rules for insurance contracts under IFRS, allows captives to simplify financial reporting due to the short-term nature of the coverage.
- However, captives are also subject to transfer pricing, substance, and reporting obligations. These need to be carefully managed, particularly when captives reinsure unusual risks or set coverage prices without clear market benchmarks.
Ensuring compliance with these regulations is critical for captives to maintaining adequate solvency levels, accurate financial reporting, and favourable tax treatment. As a result, structuring a captive solution demands close collaboration between actuarial, accounting, tax, and regulatory experts to align with both strategic and compliance objectives.
The future of non-traditional coverage
Innovation is expanding the ability of captives to cover risks once deemed uninsurable. In fact, parametric insurance, AI-driven underwriting, and blockchain hold immense potential for captives.
- Parametric insurance enables captives to establish predefined payout triggers, ensuring swift and transparent settlements. By combining traditional coverage with parametric capabilities, captives can increase their risk retention capacity, allowing them to underwrite and manage hard-to-assess losses while optimising coverage for their parent companies.
- AI-driven underwriting enhances risk assessment by analysing vast amounts of data, improving the accuracy and efficiency of underwriting processes.
- Blockchain technology offers security, transparency, and traceability, facilitating seamless and tamper-proof transactions.
Together, these technologies empower captives to enhance their risk management capabilities, optimise operational efficiency, and provide more tailored and responsive coverage solutions for today’s complex and evolving risk landscapes.
Financial and strategic advantages
Captives offer several financial and strategic benefits that traditional insurance alone can’t match. They enable risk financing, giving companies the opportunity to retain risk, build reserves and reduce their reliance on volatile external markets.
They also allow businesses to retain underwriting profits that would otherwise flow to external insurers through premiums. This retention also enhances cash flow management, providing greater control over claims and payouts.
Additionally, captives facilitate improved risk management and loss prevention. In fact, by being aware of their risk profile and closely monitoring risk exposure and claims patterns, companies can implement targeted risk management strategies that combine safeguards, penalties, and incentives, ultimately reducing overall risk.
More than just an alternative to insurance, captives are a strategic tool that support long-term planning, financial stability, and alignment with broader business objectives.
Balancing opportunities and challenges in captive insurance
As outlined in the previous sections, captives offer significant advantages, but they also come with challenges that require careful consideration. Since captives operate as (re)insurance companies, they must comply with regulatory and prudential frameworks applicable to the insurance sector.
In this context, establishing and maintaining adequate capitalisation is essential to ensure that captives can meet their obligations. Risk aggregation, or the accumulation of diverse risks within a captive, must be managed to avoid overexposure and correlation between covered lines of businesses.
Additionally, predicting claims for unconventional risks with low to no historical data can be difficult, calling for robust analysis and risk assessment processes for both pricing and reserving. Finally, Captives handling complex risks must be well-governed, professionally managed, and transparent in their reporting to meet regulatory and stakeholder expectations.
Businesses must weigh these factors carefully to maximise the benefits of their captive solutions and achieve effective insurance cost control, adequate risk coverage, as well as financial and tax efficiencies.
For businesses facing non-insurable risks—those often excluded by traditional insurers—captives provide a compelling alternative. They offer tailored coverage, financial flexibility, and strategic advantages, empowering companies to manage both existing and emerging threats more effectively.
However, successfully leveraging captives requires a clear understanding of the regulatory, financial, and operational challenges. As the risk landscape continues to evolve, captives will play an increasingly vital role in shaping comprehensive and resilient risk management strategies.
Why Luxembourg for your reinsurance captive?
Amid high global uncertainty, Luxembourg remains a leading jurisdiction for captives, offering a mature and stable regulatory framework, a business-friendly environment, and access to global reinsurance markets. As the largest reinsurance captive domicile within the European Union (EU), the country provides a business-friendly environment supported by strong expertise in captive management.
The Commissariat aux Assurances (CAA), the country’s regulator, applies a rigorous yet pragmatic supervisory approach, ensuring compliance while allowing flexibility for captive operations. With over 190 licensed captives as of 2024, the country has developed a strong ecosystem, offering access to top-tier financial institutions, actuarial specialists, and legal advisors, all of which contribute to efficient captive management.
Additionally, captives in Luxembourg benefit from a well-structured tax and accounting framework that includes the deductibility of reserves, access to double taxation treaties, and strategic financial planning advantages. As an international financial hub, it also offers direct access to global reinsurance markets, reinforcing its attractiveness for multinational businesses.
For companies seeking a secure and strategic location to establish their reinsurance captive, Luxembourg stands out as the premier choice within the EU. Want to know more? Read our Captives Brochure, published in March 2025.
What we think

With rising insurance costs, capacity restrictions, and emerging risks (i.e. cyber, geopolitical, and ESG liabilities), businesses are rethinking their risk management strategies and increasingly looking for alternatives to traditional insurance. More and more companies are turning to captive (re)insurance to take control of their risk financing, build resilience, and reduce reliance on unpredictable commercial markets.
Captives provide the flexibility to tailor coverage, improve cash flow management, and even turn risk management into a financial advantage by retaining underwriting profits. As companies look for smarter ways to manage risk, captives are proving to be a game-changer—offering long-term stability and cost efficiency in an ever-changing world. Now is the time for businesses to explore these innovative solutions and take charge of their risk strategy.
