Experts from AM Best delve into transformative trends in European captive insurance market, outlined in their latest report ‘New Domiciles Are Changing the Landscape for the European Captive Insurance Segment’
The report highlights re-domiciliation trends across European jurisdictions. What strategic considerations are driving parent companies to relocate their captive insurance entities?
Andrea Porta: The main driver of recent captive re-domiciliation has been parent companies’ strategic choice to move their captive insurance operations to the country in which the group is headquartered. This contributes to improving coherence with respect to the geographical location of the entities belonging to the group, as well as bringing operational synergies.
Parent groups typically have an established insurance division that is responsible for devising the insurance strategy and purchasing the required insurance covers through their captives and the commercial market.
These insurance divisions also work with the captives to devise their reinsurance strategy to determine net retained risk for the group based on its risk appetite. Captives are often lightly staffed, and the interactions with the parent’s insurance division are frequent, so being domiciled in the same jurisdiction can streamline collaboration, bringing benefits and synergies.
However, specific European jurisdictions historically offered very favourable regulatory regimes, and, as a result, a high number of captives were established in domiciles like Guernsey or Luxembourg to take advantage of attractive legislation, at the expense of geographical coherence.
Recent legislative developments towards more attractive regulations — in domiciles such as France and Gibraltar — are prompting parent companies to consider moving their captive insurers to the jurisdiction in which the group is headquartered.
How are emerging European domiciles such as France reshaping the captive insurance landscape, and what regulatory innovations are driving this transformation?
Morgane Hillebrandt: France established a new captive framework in 2023 to increase its attractiveness for captives. As such, captives established in France are authorised to build up tax-free resiliency provisions, a reserve that can represent up to 90 per cent of their technical results.
This is a significant advantage that, along with geographical coherence, seems to have helped a number of French groups in making the decision to set up or repatriate their captives to France in the wake of the new regulation. However, while the number of licensed captives in France is increasing since the enforcement of the new framework, the French ecosystem remains nascent, and the regulation includes a review clause in 2025.
Given the hardening commercial insurance markets, what unique value propositions are captives offering their parent organisations that traditional insurance cannot match?
Porta: The principal advantage for captive insurers is the clear understanding of the risks and requirements of their parent companies which allows them to provide suitable covers. Captives have proven to be extremely effective in ensuring that their parent’s insurance needs are satisfied, especially with regards to risks not easily insurable in the commercial market, offering greater flexibility in designing tailor-made solutions for the parent’s needs. In many cases captives have been able to provide better terms and conditions than the commercial market.
In light of the challenging reinsurance market cycles of 2023–2024, what strategic adaptations are European captives implementing to maintain capacity and manage risk effectively?
Kanika Thukral: During hard reinsurance market cycles of 2023-2024, European captives have generally continued to meet the insurance demands of their parent groups and have moderately increased their net retentions where reinsurance capacity has been tight for some lines such as property cat and casualty.
In addition, European captives have remained focused on maintaining underwriting discipline. As such, in 2023 and 2024, most European captives experienced tightening of terms and conditions rather than loss of reinsurance capacity. Since captives are subsidiaries formed to support the insurance needs of their parent groups, they often are not subject to high dividend expectations.
Parent groups are generally supportive of capital accumulation at the captive level so that they remain well-capitalised to absorb moderate net retention increases during hard reinsurance cycles.
Captives have a good understanding of parent groups’ operations and risk management practices. As such, they benefit from a strong ability to assess the risks being underwritten by them and can price them appropriately.
With geopolitical tensions and climate volatility increasing, how are captives evolving their risk assessment and coverage strategies, particularly for complex risks such as cyber and business interruption?
Hillebrandt: One of the advantages of successful captives is that they have direct access to information from the parent group or company which allows them to appropriately assess risks and provide suitable cover. This is particularly true for more complex risks including cyber. Thanks to this, captives are a very useful risk management tool for lines in which there may be capacity constraints such as certain liability risks or cyber.
Indeed, we have seen certain cases in which some captives have been able to maintain terms and conditions whereas the commercial market has overall been working on refining terms and conditions and in certain lines has put in place more stringent restrictions on covers.
We have also seen certain captives decide to increase their participation in particular risks in order to continue to offer suitable covers to their parents. This has generally had a positive effect on insurance costs for the parent.
AM Best's rating analysis shows most European captives maintaining stable ratings. What underlying financial and operational characteristics contribute to this rating consistency?
Thukral: Most European captives rated by AM Best have a track record of stable ratings. The rated captives tend to be well-capitalised, as measured by both their regulatory solvency requirements and by Best’s Capital Adequacy Ratio (BCAR).
The operating performance of European captives has generally remained positive and in many instances, it has been favourable over the underwriting cycle. In addition, business profile and enterprise risk management fundamentals are typically stable given the strong regulatory regimes in Europe.
Lastly, the ultimate parents of European captives continue to evidence ability and willingness to support their captives if required, in most instances.
The upcoming Solvency II amendments suggest a more proportionate regulatory approach. How might these changes fundamentally alter the operational framework for EU captive insurers?
Marving Lopez: The upcoming amendments to the Solvency II Directive are set to establish a more proportionate regulatory framework for EU captive insurers, bringing operational changes.
The ‘small and non-complex undertakings’ classification provides simplified requirements for eligible EU captives, which include reduced reporting obligations, such as less frequent
Own Risk and Solvency Assessments and longer gaps for governance policy reviews. Additionally, EU captives may qualify for exemptions from complex reporting requirements, such as long-term climate change scenario analyses, recognising their limited exposure to such risks.
The upcoming amendments are designed to reduce administrative burdens on EU captives, allowing them to focus on their primary role of underwriting and managing the insurance needs of their parent groups.
The amendments are expected to introduce a streamlined approach that accommodates EU captives’ specialised business models while maintaining a robust oversight. Finally, the amendments indicate a constructive move towards greater proportionality and reduced regulatory complexity on what is often a relatively lean operating structure.
How are the concurrent implementation of IFRS 17 and the Digital Operational Resilience Act creating new compliance challenges and opportunities for European captives?
Lopez: Both IFRS 17 and the Digital Operational Resilience Act (DORA) introduce complexity. IFRS 17 brings revised financial reporting for insurance contract accounting with detailed data accuracy and transparency, while DORA enforces stringent cybersecurity and IT resilience requirements.
Captives often operate with a lean structure and are therefore often resource-constrained, facing higher costs for compliance, including, where necessary, technology upgrades, consultancy, and training.
European captives reporting under local Generally Accepted Accounting Principles (GAAP) but with parent companies reporting under IFRS have been required to revise their financial reporting processes and data management for their parent company’s reporting.
Integrating financial systems that meet IFRS 17 standards while adhering to DORA’s resilience requirements adds further pressure. European captives’ need to integrate these requirements creates a more costly and complex compliance environment which is often supported by the expertise and resources from its parent groups.
On the other hand, these regulations offer the chance to modernise operations and adopt newer systems, improving efficiency and risk management. DORA’s focus on resilience reduces operational risks, while IFRS 17 improves financial transparency and decision-making.
Consequently, making European captives more resilient and better equipped for future challenges.
