The impact of the COVID-19 pandemic is the most significant challenge that European captives have faced in the last decade, according to tax compliance and regulatory reporting firm Sovos.
The company’s latest guide on insurance premium tax (IPT) explores the changing landscape for European captives in a post-pandemic world and how captives can best position themselves to navigate the challenges ahead.
The report notes that although the number of captives domiciled in Europe has “stagnated, if not fallen”, the continent is still the third largest global captive domicile, hosting 900 active companies that constitute around 15 per cent of captives in the world.
Guernsey and the Isle of Man are highlighted as the most popular jurisdictions, with Luxembourg, Ireland, Malta and Gibraltar noted for their specialisation in reinsurer captives, pure captives and protected cell companies, respectively.
Other challenges from the last decade include the Solvency II regime, which initially posed a greater administrative and regulatory burden but has now been overcome by the majority of the industry, and anti-profit shifting schemes which have increased the level of regulation, especially with country-by-country reporting requirements
Sovos observes the most critical question for captives in a post-pandemic insurance industry will be the ability to cover pandemic risks.
Although the report recognises that, in practice, captives already cover business interruption not consecutive to material damage, there is an important difference between insuring a pandemic locally and globally.
For example, if all jurisdictions covered by a captive programme are affected, it is extremely complicated for a captive to compensate all of its local insureds.
Sovos suggests the solution may be combined insurance and reinsurance schemes, such as the Pandemic Risk Insurance Act which has been introduced to the US Congress.
The report also examines the evolving digital tax landscape, which has seen IPT become much more complex and fragmented over different jurisdictions, which vary in currency, rate, deadline and location of risk rules.
The increasing complexity of IPT compliance has also raised the consequences of non-compliance. These are no longer limited to statutory or legal penalties, and now include, to a more significant degree, the inconvenience and cost of fixing an error, representative costs, and reputational damage.
However, on a more positive note the report also recognises technology can empower the insurance industry, for example through the launch of innovative new products and distribution channels, improved claims management, and modernised legacy systems.
