ECIROA
Guenter Droese, executive director of ECIROA, discusses how the European captive market has fared in 2018
How has the European captive market fared in 2018?
It has been different from past years due to the impact of Solvency II. We have seen captive managers and boards considering broadening their coverage and the protection they offer their parent companies, often in a bid to use the employed capital better than before.
Beside that, we don’t see any big changes but we are hopeful that there will be some improvements to the regulatory environment for captives. Some captives have stopped underwriting, but this has been primarily in the case of small captives or due to mergers amongst captives within the group of a multinational. There has been no huge development, which is perhaps surprising considering some predicted Solvency II would have a negative impact on the market and reduce the activities of captives.
What trends have you seen?
One big trend seems to be employee benefits, which allows you to carry risk, based on a pay in/payout structure that does not harm the equity significantly. It is helpful for the overall quantification process of the capital needed. Employee benefits will be a useful byproduct for each and every captive because it can provide extended coverage which differs from the market. So, you may have less discussions about a single claim. It makes a lot of sense to share the risk in the captive with some local service providers to optimise the situation for the insured and the beneficiaries.
Another relevant issue is the impact of digitalisation on international programmes and on the management of claims handling. Digitalisation may help business where a high degree of standardisation is possible. In these cases, without a need to follow high complexity when the processes can determined easily and simplified cost may be reduced, for example, in the settlement process of claims.
Blockchain is an interesting topic. Again it is a question of standardisation. I am reluctant to say this will be a big opportunity and a reasonable option as long as there are questions around cost, the number of partners you need, the clarity of cover provided in the smart contracts, and the control over the entire process chain are not answered to satisfy a critical customer. We have to wait and see how this technology and its application develop.
Emerging risks such as cyber are a huge opportunity for captives to start in such lines of business based on a rather high self-insured retention, combined with layers above, placed in the market with the self-determined high attachment point.
What is the regulatory environment like for European captives?
The majority of regulators, not all of them, are still very much bound by and keen to follow the Solvency II regulation requirements more or less in detail. All insurance companies which are supervised in Europe are impacted by Solvency II. There are no exclusions and no simplifications. Captives` activities are supervised under the Solvency II regime as all commercial insurance companies, which is remarkable.
The captive community has some problems understanding why the principle of proportionality is not applied by supervisors according to the definition of this principle in the European Treaty. Proportionality would allow some simplification for captives with cost and work reductions, without offending the targets and the main requirements of Solvency II.
Do you see Brexit impacting the market at all?
The first big point is if and when we have Brexit, the UK will no longer ‘belong’ to Europe. We will have to wait and see how the discussion and the final agreement between the two parties develop.
As long as we don’t have freedom of service anymore, which will be the first step in Brexit, the UK regulatory system will need to be equivalent to the Solvency II regime.
The question is whether the UK will change anything. At this point I don’t know if they will. The major insurance players have reacted and the number of cross border policies (more than 75 percent) have been allocated to the European Economic Area, i.e Europe without the UK.
Even when the UK system is equivalent and reinsurance contracts between the various countries are easy to place, this does not mean you have direct insurance placement from the continent into the UK. This will not happen and I am pretty sure this will cause quite a lot of problems. English insurers are well advised to open a separate entity on the continent, as many of the big insurers already have. Whether they like it or not, looking forward this will be the best solution.
It is demanding and challenging to establish a new insurance company with a board and all the registration, capital, and reporting requirements, but most of them will belong to a holding structure with specific rules which they apply anyway.
Are there any obstacles you think may limit the growth of the European captive market?
There might be some closures over the next few years due to the rather small size and volume of activity. Beside that, those captives which are pro-active anyway will extend their underwriting, primarily to use the employed capital better.
One point to consider is the number of European countries where the use of captives is not very developed.
When you look into Germany, for example, it is difficult to understand why the country’s industry, trade and finance do not consider the advantages of the captive activity and its performance in its complexity and simplicity.
Another potential obstacle is understanding. Do the owners or the CFO’s in these companies really understand the value of a captive? I like to say that we should not always focus on the entire market from an insurance perspective, we should view the issue as how you finance events which may harm your company’s performance.
From that perspective a captive is a tool which can simplify and make it easier to find these finance structures, in cooperation with the insurance and reinsurance market.
