There are quite widespread misconceptions about captive insurance, and it is important that European tax authorities understand better how captives support European business.
There are quite widespread misconceptions about captive insurance, and it is important that European tax authorities understand better how captives support European business. This is not about tax, but a fear that the administrative costs of owning a captive will become uneconomic, and companies will lose a valuable tool of enterprise risk management.
The Federation of European Risk Management Associations (FERMA) represents the interests of more than 4,700 risk and insurance managers, and about one-third of them work in organisations that use a captive to manage some risks of their operations.
We are, therefore, trying to dispel misconceptions about captives current among international bodies and tax regulators. We have prepared a position paper on captives that we are first sending to the OECD so that the views of risk managers are taken into account in the discussion on implementation of the base erosion and profit sharing (BEPS) measures. We have also urged our 21 member associations across Europe to use the position paper to approach their national tax authorities, which will be responsible for deciding how to implement the BEPS measures, to explain the real risk management value of captives.
Captives play an important role in increasing the resilience of European businesses. We see this as an important aspect of captive insurance for the Organisation for Economic Co-operation and Development and the EU to understand. Insuring through a captive is not just a transactional exercise in saving money on insurance premiums or getting additional risk capacity not available from the commercial insurance market, although those are incentives.
They focus the mind of management on improving risks, since it is very clear how much losses insured through a captive cost. The captive can provide global loss distributions that allow management to analyse the results and incorporate them into the enterprise risk management process across the company’s sites and processes. Reducing the number and extent of losses in this way contributes to the ability of the company to take business risks and so contribute to economic growth.
Already the complex Solvency II data analytics and reporting are increasing the cost pressures on captives. We find it ironic that Solvency II was designed to include captives as much as possible as normal regulated insurance companies, despite requests from the risk management community for more proportional regulation.
Now BEPS and initiatives from the European Commission are differentiating captives from the rest of insurance companies.
Proving compliance with the BEPS requirements we believe will add further costs for captive owners. Our hope is that the what we are doing for Solvency II will be instrumental to prove BEPS compliance at moderate additional cost for EU-domiciled captives and, therefore, will be not prohibitive to maintaining a captive.
What we do not know is the extent to which the extra administrative costs will discourage the formation of new captives.
Finally, in light of the latest corporate transparency and anti-tax avoidance measures at the EU level, FERMA will also reach out to the European Commission and Parliament to increase their understanding of the role of captives in the European economy. This follows the adoption in July of the Anti-Tax-Avoidance (ATA) Directive by the Council of the EU.
The treatment of captives under the ATA Directive should also remain consistent and aligned with the Solvency II regime where captive insurance companies are subject to the same regulatory environment in terms of governance, risk and capital as other insurance and reinsurance companies.
FERMA believes it is crucial that tax authorities understand the positive technical risk management aspects that captives can represent for multinational organisations.
Although we are convinced that EU-domiciled captives will pass the BEPS test, the administrative costs of owning a captive are very likely to rise. That will increase the total costs of doing business which is not in anyone’s interest.
BEPS, EU anti-tax avoidance and financial transparency initiatives will be the subject of a risk managers-only discussion at the FERMA Seminar in Malta on 3 and 4 October. There will also be a presentation on captive insurance and cells in Malta. For more information, see http://www.ferma.eu/ferma-seminar-2016/
The full FERMA position paper on captive insurance companies is available on the FERMA website at www.ferma.eu
