Does Captive Insurance Improve Cash Flow? A Study of Japanese Nikkei 225 Companies

Abstract A captive – short for a captive insurance company – is an alternative technique for businesses to finance risk. Captives are formed by their parent companies which can retain and mutualize risks within corporate structures. Theoretically, captives can enable parent companies to access efficient risk financing, streamline risk management, and optimize cash flows with recaptured premiums. This study aims to assess the effects of captive formation on cash flow among Nikkei 225 companies from 2000 to 2023. Our empirical evidence shows that captives provide non-financial Japanese companies with potential opportunities to boost cash flow from operating activities rather than from investing activities. In particular, a positive relationship between captive utilization and operating cash flow is more likely to materialize when firms have a short public trading history and possess a higher proportion of intangible assets. Overall, we find that captives can improve operating cash flow, which may have positive value implications for shareholders.