Luxembourg, or the Grand Duchy of Luxembourg as it is officially known, may be a landlocked country, but that certainly hasn’t restricted the market as the Western European jurisdiction still stands as the largest reinsurance domicile in the EU.
Luxembourg, or the Grand Duchy of Luxembourg as it is officially known, may be a landlocked country, but that certainly hasn’t restricted the market as the Western European jurisdiction still stands as the largest reinsurance domicile in the EU.
Last year, the Centre des Conférences in Kirchberg was the venue for the European Captive Forum, which was organised by the European Captive Insurance and Reinsurance Owners Association, proving that Luxembourg is definitely a recognised European destination.
Claude Jacoby, audit partner at PricewaterhouseCoopers (PwC) Luxembourg, explains that in 1984 the country set up a legal, regulatory and tax framework that was favourable to reinsurance companies.
Jacoby says: “[The framework] thus anticipated the 2005 European directive on reinsurance (2005/68/EC), which established a prudential framework for reinsurance as far back as 1991. This anticipatory measure has made Luxembourg an appealing place to set up a reinsurance captive.”
Based on figures published by the insurance and reinsurance regulator as of 1 July 2013, 237 reinsurance entities currently reside in Luxembourg. Popular parent companies of the captives tend to reside in the manufacturing, banking, insurance, and retail industries.
Sophie Vandeven, business development manager at Aon Insurance Managers in Luxembourg, explains that the domicile mainly manages reinsurance captives and reinsurance companies.
Jacoby adds: “PwC Luxembourg has developed a strong captive expertise with dedicated specialists across a variety of business areas. Our insurance and reinsurance practice offer a wide range of services to our clients, from regulatory set-up to audit and transaction support services; we also cover relocation matters from other EU or non-EU countries to Luxembourg.”
According to Jacoby, PwC recommends Luxembourg as a potential captive domicile for a number of reasons.
Luxembourg is strategically placed at the heart of Europe, he says, with a neutrality, welcoming and safe environment, and financial well-being that makes it a potential destination for captives.
It also has a skilled multilingual workforce and excellent infrastructure, while being host to top-level multinational financial and IT clusters, and flexible and open-minded authorities.
He says: “Moreover, Luxembourg has demonstrated over the last decades that it is a prime location for the insurance and reinsurance sector within the EU. Lawmakers, decision-makers and regulators are all at close quarters and have traditionally enjoyed a relationship of mutual understanding with business people. This led to a rapid decision-making process as well as a stable and friendly business environment.”
Jacoby explains that in 2005, the European Reinsurance Directive “implicitly endorsed” the regulatory framework established by Luxembourg back in 1991.
“Since then, Luxembourg benefits from this framework which allows a captive under the supervision of its member state of origin to cover risks within the EUwithout having to apply to other member states for a licence and also lays down prudential regulations relating to technical provisions and representative assets.”
“The directive also explicitly endorsed Luxembourg’s prudential system, which allows reinsurance undertakings to equalise claims fluctuations over a future period of time, and to cover special risks through the claims-fluctuation provision (equalisation provision),” adds Jacoby.
Vandeven also sees the country’s compulsory equalisation reserve “to build up non-taxed risk capacity” as a reason for settling in Luxembourg, alongside ‘client friendly’ control authorities.
Keeping in check
As the Solvency II train steams ahead, it seems that Luxembourg is not as wary of the regulation as other domiciles, even choosing to implement early.
Jacoby explains that in order to pass the law as soon as the EU will come to an agreement on the final content and date of application, Luxembourg has already included Solvency II regulation into two draft bills, which are currently being revised by the the country’s parliament.
“The regulator has been working on Solvency II from 2009 onwards to ensure that the market players will be ready to go live when required. Since 2010, the regulator has progressively introduced additional requirements in the reporting framework, such as technical provisions’ best estimate determination, and economic balance sheet,” he says.
But despite the rush towards implementation, Jacoby says that reinsurance undertaking shouldn’t be specifically disturbed by Solvency II challenges, which “might not necessarily result in much more capital requirements, provided that the equalisation provision qualifies as eligible own funds”.
