GRAND CAYMAN, Cayman Islands—With the economy recovering but weak and many companies still pressed for capital, captive insurance company leaders looking to maintain appropriate funding might find themselves at odds with parent companies looking to tap what they see as idle capital.

In that environment, it's important that captives find ways to demonstrate financial flexibility, according to a group of panelists who spoke at the annual Cayman Captive Forum this month in Grand Cayman.

As a form of contingent capital, reinsurance can help provide that flexibility, the panelists said, though it's essential that captives form sound reinsurance relationships if they want to realize that benefit.

Clayton Price, managing director and office head at Marsh Management Services Cayman Ltd., a unit of Marsh & McLennan Cos. Inc., said he's seen considerable demand in recent years from parent companies seeking capital that's committed to the captive. “You have to strike the right balance,” Mr. Price said.

“I would say balance is the whole issue,” said Jay Waters, vp-corporate risk management services at University Hospitals in Cleveland.

“There are an awful lot of pressures on the captive for what I would call that "idle capital,'” Mr. Waters said, adding that there's always a desire to “raid” the captive's capital, usually with promises to replenish it later, when a parent company faces tough times.

“My experience is, at the exact point in time that I need these funds the most, the parent is least likely to have those funds available,” Mr. Waters said.

“Looking at it from the outside, I think there's always a natural tension between the captive and its parent,” said Brendan Barry, senior vp at Greenlight Reinsurance Ltd. in Grand Cayman.

The proper approach to address such conflicts has evolved from simply considering capital structure to crafting an “appropriate business operations structure” to build flexibility into the business whenever possible, Mr. Barry said. “The role of the captive...is to insulate the owner from volatility,” he said. “The captive has to be strong enough and flexible enough to take that.”

“Capital is always available when you don't need it,” Mr. Barry said. “It's really about building the right partnerships and flexibility into your corporate business structure so that you don't end up going to the markets for capital when you need it.”

Mr. Waters said the biggest pressure he's faced “is to maintain sufficient excess funds” in the captive when the parent is looking for sources of capital.

Mr. Price said he's begun to see increased interest in captives using loss portfolio transfers as a way to free up capital for the parent.

“We have looked at portfolio transfers on a couple of occasions,” said Mr. Waters. “They have always seemed to be very expensive to me.”

University Hospitals puts considerable emphasis on claims management, Mr. Waters said, so its experience is probably better than what an insurer's would be with the same loss portfolio. Consequently, University Hospitals is probably better off holding on to those claims than paying what it would cost to transfer them, he said.

A well-crafted reinsurance program could provide a more cost-effective method for the captive to achieve some capital flexibility, the panelists said.

“What reinsurance really provides is a call option on capital when the organization is at a particular stress point,” said Mr. Barry.

“Particularly in the current market, reinsurance is a very efficient way to get that contingent capital,” Mr. Price said.

Mr. Waters said reinsurance is essential to University Hospitals' captive program and, like many captives, University Hospitals' captive wouldn't be able to write the business it writes without reinsurance. “It is something quite honestly few of us could do without,” he said.

But, Mr. Barry said, to use reinsurance most effectively, the approach to buying and selling reinsurance has to go from an absolute dollar-based approach to a value-based approach. It's necessary to establish long-term partnerships between captives and reinsurers, because a captive can't create real capital flexibility without them, he said.

Mr. Waters offered a similar perspective: “Captives have been put together with a long-term view of what we do. Only by partnering with your service providers for the long term will you be successful.”

“Establishing those long-term relationships, knowing each other's businesses, what each other's interests are, I think, are critical to achieving those goals,” Mr. Waters said.

He said he also tries to spread University Hospitals' captive reinsurance program among several reinsurers to make it easier to fill a hole in their reinsurance program if one company leaves the market.

Andie Welsch, vp at Greenlight Re, moderated the panel.