Captive trends for a falling rate environment 

This posture is typically designed to ensure capital remains available for liability satisfaction. While this approach is often effective at minimizing nominal capital volatility, it can introduce specific technical pressures in certain economic environments.

Across the Marsh ecosystem, which includes a global insurance broker, and Guy Carpenter, a major global reinsurance intermediary, we see a consistent set of themes across captive investors in our recent conversations. Many are grappling with the need to build flexible portfolios that reflect today’s realities, especially falling cash yields and the renewed importance of interest rate structure. In other words, some of the best strategies preserve conservatism while making every part of the portfolio work harder for the mission it supports.

However, many captive owners come from operating businesses where investment decision-making looks very different and as a result applying an insurance balance sheet lens to the captive portfolio is not always intuitive.

In a shifting interest rate environment, portfolios heavily weighted toward short-duration instruments may face increased reinvestment risk. As current holdings mature, the proceeds often must be reinvested at prevailing market rates. If these rates have declined, a captive’s projected investment income might decrease, which could have an impact on the long-term funding of certain liabilities.

Furthermore, in our experience, inflation can be a relevant variable for many captives. While a cash-heavy position generally preserves nominal surplus, the real purchasing power of those assets can decline if inflation outpaces net yield. For captives covering lines of business affected by medical or social inflation, a static investment strategy might result in a gradual erosion of the balance sheet’s actual strength over time.

One method often considered for improving portfolio outcomes without necessarily increasing credit risk is the refinement of Asset-Liability Management (ALM). Rather than maintaining high levels of liquidity by default, some captives choose to structure fixed-income holdings to more closely align with the projected timing of insurance payouts.

By extending duration to match the liability profile, a captive can often lock in yields and potentially reduce the frequency of reinvestment decisions. This transition from habitual liquidity to structured duration might allow a portfolio to capture the term premium while maintaining a consistent credit quality spectrum. In addition, captive owners can consider diversifying into securitized debt, which could give exposure to a broad investment grade opportunity set.

For some larger captives, the use of capital modelling, even in a pragmatic form, can provide a more integrated view of total balance sheet risk, particularly when evaluating the addition of other liabilities. When insurance and investment risks are managed in isolation, the interaction between the two is frequently overlooked.

Many organizations that have existing captives are looking to expand their use, according to Marsh’s Captives Benchmarking Report 2025.

A capital-aware approach can help with this and often evaluates how asset choices might affect a captive’s surplus under various stress scenarios and can often act as an important risk mitigator. This discipline can help ensure that the portfolio is sized appropriately for the risks it supports, potentially allowing for a more deliberate allocation between immediate liquidity needs and core stability holdings.

Beyond operational frameworks, a developing conversation in larger captives is whether some public investment grade bonds can be complemented by private markets exposure. In theory, this can offer enhanced yield with a similar risk profile, plus structural protections, depending on the asset class and manager. In practice, this is not yet a mainstream implementation for many captives, and it should not be treated as a default solution.

Where it can make sense is in captives with sufficient scale, strong governance, and the ability to tolerate reduced liquidity in exchange for better compensation. Even then, the emphasis should be on fit: How does the asset behave under stress, how is it valued, what are the exit options, and how does it interact with the captive’s liability profile?

For many captives, the first order priority remains getting the core public-market structure right.