Captives and the Total Cost of Risk: A Strategic Lever for Risk Efficiency

Executive Summary

In an increasingly volatile risk landscape, organisations are under pressure to do more than insure, they must actively manage risk. The Total Cost of Risk (TCOR) framework provides a comprehensive lens for evaluating risk management performance, encompassing not just insurance premiums but also retained losses, risk control investments, and administrative overhead.

At the center of the modern risk strategy is the captive insurance company a tool once seen as exclusive to large corporations but now increasingly accessible to firms of all size through innovative platforms like CaptiveIQ by Capvartis. This whitepaper explores how captives help organisations reduce their TCOR, enhance risk visibility, and take control of their financial destiny.

What Is Total Cost Of Risk (TCOR) and Why Does It Matter?

Total Cost of Risk (TCOR) is the sum of all costs associated with an organisations risk management and financing activities. It includes:

• Insurance premiums

• Retained losses (deductibles, self-insured losses)

• Loss prevention and control expenses

• Administrative and risk management costs

TCOR = Insurance Premiums + Retained Losses + Risk Control Costs + Administration Costs

By focusing on TCOR rather than just insurance premiums, organisations can make smarter decisions about risk transfer versus retention, evaluate the effectiveness of loss control programs, and ensure resources are being allocated efficiently.

The Captive Advantage: Aligning Risk Strategy With TCOR Goals

A captive insurance company is a licensed insurer formed and owned by an organisation to insure its own risks. While the upfront effort to set up a captive may seem significant, the long-term strategic and financial benefits often far outweigh the initial investment especially when viewed through a TCOR lens.

Here’s how a captive reduces each component of TCOR:

Lowering Insurance Premiums Through Risk Retention

By retaining predictable, lower-severity risks within a captive, organisations avoid the frictional costs of commercial insurance (e.g., underwriting margins, commissions, broker fees). This can reduce annual premium outlays significantly.

• Example: Instead of paying $3 million in commercial premiums, a company may retain $2 million in expected losses and reinsure only catastrophic layers, reducing total premium spend.

Reducing Retained Losses Through Data and Control

Captives collect granular claims data, enabling better trend analysis and more accurate forecasting. With tighter loss control and aligned incentives, organisations using captives often reduce claim frequency and severity over time.

• Captives create accountability: when losses are internalised, prevention becomes a priority.

• Captives also allow for flexible deductible structures to fine-tune retained risk.

Enhancing Risk Control Investments

A captive can fund and incentivise proactive risk mitigation, such as:

• Safety programs

• Cybersecurity enhancements

• Employee training

• Health & wellness initiatives

Rather than seeing these as sunk costs, captive owners treat them as strategic investments that directly reduce future claims—and therefore TCOR.

Streamlining Administrative Overhead

Traditional insurance programs often involve multiple brokers, carriers, and claims handlers each adding complexity and cost. A captive consolidates risk management functions, improving efficiency and enabling better use of internal resources.

In addition, modern platforms like CaptiveIQ automate much of the feasibility, structuring, and reporting processes, reducing the cost and time required to manage a captive.

Captives in Action: The Economic Impact on TCOR

Let’s consider a hypothetical mid-sized manufacturing firm with $100 million in revenue:

Savings: £1.1M annually                         TCOR Reduction: -18%

Beyond Savings: Strategic and Cultural Benefits

Captives don’t just reduce costs they enhance agility and culture:

• Enterprise Risk Visibility: Captives provide a centralised, data-rich view of risk across business units.

• Customisation: Policies can be tailored to the organisation’s specific exposures and claims history.

• Profit Center Potential: Captives can be expanded to write third-party risk (e.g., vendor or customer programs), turning risk management into a source of revenue.

Is a Captive Right for You?

Not every company needs a captive, but many more qualify than realise. Historically seen as tools for the Fortune 500, captives are now accessible to organisations with:

• Lower Annual premiums lower than $1 million

• Predictable or self-insured losses

• Desire to stabilise insurance costs

• Commitment to proactive risk management

Platforms like CaptiveIQ by Capvartis have dramatically lowered the barrier to entry, making it faster, more affordable, and less complex to assess, structure, and launch a captive strategy.

Conclusion: Captives Are the Cornerstone of Modern TCOR Strategy

The future of risk financing belongs to those who take control. In a market where premiums are volatile and losses are rising, organisations can no longer afford to outsource all risk. Captives empower organisations to transform risk into a manageable, strategic asset and the impact on Total Cost of Risk is measurable and significant.

At Capvartis, we believe in democratising the captive journey. With CaptiveIQ, we bring automation, intelligence, and clarity to every stage from feasibility to formation to optimisation so your team can focus on what matters: building a smarter, more resilient organisation.

Ready to explore how a captive can reduce your TCOR?

Get in touch at www.capvartis.com or connect with us on LinkedIn to start your captive journey today.