Owners of European captives continue to see value in using them, despite prevailing weak premium rates and widening terms and conditions in large sections of the general insurance market, according to an A.M. Best report.
The report, European Captives Demonstrate Enduring Appeal of Alternative Risk Transfer, explained the expectation that captive owners would make more use of the open market during a soft cycle, and place more risk through captives during a hard market, has not played out.
Instead, the report revealed, captives have continued to play an important role regardless of the market cycle.
Although captives have remained an appealing source of alternative risk transfer during the soft market, the report suggests there are challenges ahead for the industry.
These include the Organisation of Economic Cooperation and Development (OECD) action plan on base erosion and profit shifting (BEPS), the need for contingency plans for captives impacted by the UK’s exit from the European Union, and an increasing regulatory burden, both within and outside of the EU.
Mathilde Jakobsen, associate director and co-author of the report, said: “The European captives rated by A.M. Best are generally well-integrated in their parent’s overall risk management framework and are valued for the benefit they bring to the group’s risk management, independently of any savings on insurance buying.”
The report noted that although the OECD’s action plan on BEPS is not directly aimed at the captive insurance industry, it will have “significant implications” for captive insurers.
Konstantin Langowski, financial analyst and co-author of the report, added: “Captives that are used simply as a risk financing tool will come under even more scrutiny by taxation authorities in the future.”
According to A.M. Best, the improvement in risk management among captives, led by regulatory demands, is positive.
The ratings agency said: “A captive with strong risk management capabilities is likely to achieve more sustainable earnings and have a better understanding of its capital needs. In addition, strong risk management will help captives deal with challenges such as BEPS and Brexit.”
