Gras Savoye Willis Towers Watson
Earlier this year, the French Prudential Supervision and Resolution Authority approved a reinsurance captive in France for the first time in 20 years, Laurent Bonnet of Gras Savoye Willis Towers Watson outlines what the French market currently looks like, and the future
What does the captive market look like in France?
Until last year, the captive market in France was relatively calm. There were only five captives, which is very few compared to other domiciles in Europe like Luxembourg, Ireland or Malta. The past year in Europe, the captive market has been more restricted, mainly due to the soft market effect, with numbers of captives decreasing.
But the hardening of the market last year started clients/groups thinking about a retention strategy. It increased the need for a captive to make their insurance and insurance budget programme comply with regulations, in order to fight the hardening market.
In this context, France became an attractive place due to two major events.
The first event was the coming of Solvency II, which led to common regulations for all European countries. This means the captive insurance regulations are now the same for every European country. In this respect, there is no real difference between a domicile in Ireland, Malta or France.
The second is the issue of the Base Erosion Profit Shifting (BEPS) paper by the Organisation for Economic Co-operation and Development (OECD) which led to the move to combat the erosion of profits in various countries and to counter tax evasion. This paper highlights the special nature of the insurance sector and captives. Moreover, it led to attention being focused on the different countries where captives’ assets are held, and to consideration of and protection of the divisions around captives. This resulted in an examination by French authorities of captives based outside France.
These main events sparked the interest of French groups to implement captives in France. Thus, France has now become a likely candidate to welcome more captives in the future. The advantages of implementing a captive in France are many. Some companies might even consider moving their existing captives to France.
What are the biggest challenges/opportunities for the captive insurance industry in France?
At the present time, the captive insurance industry is facing numerous challenges in France.
One of these is educating people, many of whom are not yet convinced that the regulator is keen to have captives in France. However, this issue is marginal compared to our main challenge which relates to the tax issue. It is vital to understand the need to have a specific treatment of the captive’s reserve capacity. As opposed to a professional insurer who can write and mutualise various lines of business and are able to compensate a loss from one insurance policy using profit from other policies or risks. In addition, a captive does not have the objective to male profit - a captive should be able to take into consideration mid-term or long-term stability of the insurance programme. So, as permitted by the Solvency II regulation, a bad year could be counterbalanced by a good year, which means that the captive should be able to create equalisation reserves, placing profit into a reserve in good years to allow for bad years, and not supporting tax during the good years and leading to a tax deficit when the years are bad. In other words, avoiding cash flow out and cash flow.
The main opportunities for France lie in the captive having the same address as the company headquarters because it gives access to all the resources of the group. It offers faster communications for the captive space, as you are close to the insurance department and the finance department. You can also involve more people than you would if, for instance, the group’s captive was in Ireland, Luxembourg or elsewhere. Moreover, this allows the CFO or deputy CEO to take part in the captive meetings. Also, this configuration gives the group the opportunity to raise awareness of the captives’ cost efficiency and enables potential discussions about how to reduce loss or to make retention.
I personally had the opportunity to participate in a captive meeting with a CFO, speaking to the head of operations about a real situation in the field, what happened and how the issue could be solved.
These conversations only happen when you have everyone around the table, because when people are in other countries, clearly they can’t all be at the table together.
What changes do you see for France’s captive market over the next 12 months?
Before COVID-19, due to the hardening market and its consequences, a lot of people considered moving their captives to France or setting up a new structure. But today we are facing a complicated situation where people are concerned about the market’s future shifts.
On the other hand, they are under a great deal of pressure from group head offices to reduce or to end any investment and focus on COVID-19 instead.
We don’t know exactly how the market is going to react, apart from the fact that the trend will almost certainly increase. However, we will face somewhat greater losses than expected this year due to the huge drop in activity. We also understand that financial markets have fallen so much that there will be an impact on the balance sheet and on the solidity ratio.
It’s difficult to have a vision of whether or not the market will increase from next January and whether clients will be able to relocate some of their cash from investments to a captive.
Do you think there will be a surge of new captive formations in light of the current COVID-19 pandemic?
Captives are a perfect tool to cover all business interruptions. We do have many clients that have put solutions in place that involve captives insuring the pandemic risk.
The only issue with a COVID-19 type of situation is that it’s so global that even with a captive solution, there is never enough capacity to compensate for this situation. Since it’s so widespread, if you indemnify all your subsidiaries for the loss they suffered, in the end, they will receive just a few euros.
Captives are a good solution for supporting a global strategy and for supporting entities specific loss/exposure.
I have some clients that have decided to not activate their cover reinsured by their captive because it made no sense for the group to use the captive as the indemnity per entity would be very small compared to the loss, each entity suffered, there is no mutualisation between entities, it would weaken their solvency position and as the captive is consolidated it would even not protect the financial performance of the group.
Previously we have had certain situations to deal with in South Korea some years ago. This only impacted South Korea so captives allowed the group to support the financial impact from this situation as it was focused on one region.
All the other subsidiaries supported the impact of the losses supported by this entity, which is the right way to see how a captive can be used as a mutualisation tool for the group.
The French Prudential Supervision and Resolution Authority approved the first captive in nearly 20 years for a client of yours. Do you think this will drive an increase in requests?
Due to the hardening market, since last year we are seeing an increase in the request for new captive and the increase of the role of the captive. There are many questions from companies that so far haven’t had captives, as they had a good price for their premium. There will be an increase in captives and I’m sure France will benefit from it. However, as previously mentioned, this was before the COVID-19 impact so perhaps it might not be visible during 2020 until COVID-19 is clear.
Why do you think it has been 20 years since the last licence was approved?
I believe this is mainly due to the fact that a few years ago French regulators didn’t properly understand the important role played by captives. It is also because the market over the last 15 years was so soft that captives were not always the solutions for managing insurance programmes. It needed negotiations with the market in order to win very aggressive premiums from the market. Before Solvency II the local regulator was the only one to establish its view on how much capital should be required for the captive and at that time in France, the French regulator had a reputation for asking for a full blended captive, which was a nuisance, compared to other domiciles. Since Solvency II was put into place, I think we have a better understanding of their expectation. With the licensing of the captive of Worldline, France demonstrates that it can be properly positioned against other domiciles for captives.
What do you think can be done to increase the amount of captive activity in France? Is more education needed?
I think if we can benefit from a system which is permitted by the European insurance legislation, like that in other domiciles, to mutualise the good years and the bad years as in other countries, it would be the launchpad for France as a captive domicile. Captives are not in the core business of the group, so they are focused on the right use of capital allocated to a captive. They are focused on the most efficient way to benefit from a risk management tool. For example, they are interested in the capacity to make the captive part of the cash arrangement as all the other entities of the group.
France will never decrease its tax rate or have an aggressive tax rate for captives – that is not the attitude adopted here. So we will never be able to use the same arguments as Ireland, Malta and other countries. But if we can have this mid-term long-term strategy through an equalisation reserve it would be very well welcomed.
I am convinced we are going to see an increase in the French market and thus to increase all the activities around captives. It will also bring into France many more professionals, lawyers, accountants, bankers, actuaries and others working in this area. ■
