Risk Retention Strategies for Customers in a Hardening Market


Disruption and uncertainty in global commercial insurance markets have led companies to look at ways of increasing their risk retentions, with the attendant increased risks to their balance sheets. Insurance markets worldwide are showing rate increases, reduced capacity, and tighter underwriter scrutiny - as the market reacts to the implications of the COVID Global Pandemic, social inflation, above-average catastrophe losses and downward pressure on investment returns. 

Currently, rate hardening is the strongest it’s been in 20 years, and we expect this trend to continue into 2022. This article shares practical options for customers to manage risk retention strategies, while improving the efficiency of their insurance programs, and managing the downside risks of increased retentions responsibly.

On the left, is pure risk retention, with the insured effectively taking the risk themselves. On the right, is pure risk transfer, where the insured is transferring the risk to the insurance market.

The best solution for each customer can fall in different places on the spectrum, depending on the customer's risk appetite, capital position, exposure, and other factors. The solutions explored here are not off-the-shelf products, they can be customized to the insured’s circumstances and risk appetite. 

The graphics show where these tools can fall on the spectrum. Often you can pull different levers within these tools to move that arrow one side or the other. 

Tool 1- Efficient Fronting

Efficient Fronting tends to fall to the pure risk retention side of the spectrum.  

Where the insured wishes to increase retention levels, they may need to evidence a lower retention level, for example for a contract with a supplier, or a customer. In the example below, the insurer provides an insurance policy for the $4m gap between the retention (that the insured has to evidence: $1m in this example) and the higher retention in their main program ($5m in this example). 

The risk is effectively sent back to the insured, typically through a Reinsurance Agreement or an Indemnity Agreement. The insured is retaining the higher level of risk they are comfortable with, but they also have an insurance policy that allows them to evidence a lower risk retention level, where necessary.

The insured should stress test these assumptions to ensure they are willing, and able to take multiple hits. The insurer will require a fronting fee for this service to cover the credit risk and the potential claims handling cost but there's no pure insurance risk transfer. 

Find out more about our fronting solutions

Tool 2 - Aggregate Stop Loss

The insured may have the appetite for increased risk retention but wants to cap the downside risk potentially caused by several losses. Aggregate Stop Loss cover provides insurance protection for the insured, where the aggregate losses in that layer exceed a predefined threshold. Covers can operate on a single year or a multi-year basis, the latter giving the insured long-term stability around how much risk they’re taking within the retention layer. 

Within that red retention layer, the insured is going to take the first USD10m of aggregate losses, over a 3-year term. If the losses exceed USD10m, the Aggregate Stop Loss cover will step in, and control the insured’s losses. That's a USD15m aggregate limit, excess of the USD10m insured retention. In an extreme situation, after the Aggregate Stop Loss is exhausted, the insured would step back in.

Some key considerations for the Aggregate Stop Loss tool are the insured’s risk appetite, the insured’s situation, the exposure that we might expect, and the insured’s capital position. 

Aggregate Stop Loss alone doesn't necessarily solve the requirement to evidence cover at a lower level. To achieve this, the insured may need to use one of the other tools.

Tool 3 - Virtual Captives

The insured is looking at increasing retentions and has decided that a captive would be an effective solution. The insured, however, doesn't want to set up a captive from scratch. 

This is where a Virtual Captive solution comes in. It is effectively an insurance policy, typically multi-year, with mechanisms built in that replicate the mechanisms of a captive. Utilizing the insurer's balance sheet and administration infrastructure, to get the same benefits that you would get out of a captive, but via an insurance policy. 

There are a few different attributes - a multi-year term and a premium funding component to help fund losses. There's a low claims bonus at the end of the term, to replicate an underwriting profit in the captive, with a dividend back to the parent. And there's typically an Aggregate Stop Loss component built in, to help manage losses that exceed the funded premiums over the period.

In this example, the insured funds USD1.67m per year over the 3-year period, which funds a full limit within the USD5m retention. Here we assume USD1m in losses each year. The USD5m of funded premiums is used to pay these losses. A low claims bonus is awarded to the insured at the end of the term, as the funded premium exceed the losses - replicating a dividend back to the parent after an underwriting profit.

There are several potential motivations for a Virtual Captive

  • The insured may like the captive mechanism but doesn’t want to go the full-blown captive route. 
  • At the end of the policy period, if the insured decides not to continue with the arrangement, there are no winding down issues, as there can be with winding down a captive. 
  • Through the Virtual Captive route, (hopefully) the insured can build up some capital.  At the end of the 3-year term, they have an underwriting profit and they get a low claims bonus, which they could use to partially capitalize a full-blown captive. 
  • By using the Aggregate Stop Loss component within the Virtual Captive, the insured can minimize their downside risk, where the losses significantly exceed their projections.  

Learn more about our virtual captive solutions.


These tools for handling increased retentions are very flexible and can be customized to your specific needs. We can pull different levers within these structures to move the arrow on the Risk Retention Spectrum and find the right balance of risk and reward for each customer. Contact us to learn how these solutions can support you.


Virtual Captive


Managing the hard market: risk retention strategies and solutions