Frances Jones reviews captive growth in Europe, while assessing proposed amendments to Solvency II regulations, set to facilitate further expansion within the EU
Interest in captive insurance is increasing across Europe, and this surge is showing no signs of slowing. Mirroring the fashion world, France is leading the charge. The country launched a new captive regime in June last year, sowing the seeds of a captive revolution. This begs the question — is France set to bring down the guillotine on offshore domiciles, such as Bermuda? This legislation refresh prompted an uptick of curiosity in self-insurance from Germany, Italy, Spain and the UK.
“Captive insurer numbers are set to grow in Europe as more jurisdictions seek to lure companies,” according to ratings company AM Best. Its 2023 market segment report on European captives also highlighted growth within existing European jurisdictions and new domiciles coming online.
European captive market experts have witnessed an increase in cessions to captives over the last few years in response to market shifts for traditional global programmes, including property, casualty, cargo and cyber. Hard market conditions have encouraged a number of companies to turn to captive insurance to provide coverage that is too expensive or difficult to obtain in the traditional market. These conditions are characterised by diminished capacity, high premiums and stricter underwriting standards, as well as widespread volatility and uncertainty.
London-based insurer AXA XL is seeing clients place new and emerging risks into their captives in the region, such as environmental impairment liability and employee benefits. Additionally, it has observed its clients placing niche risks that are specific to their group’s activity, such as construction.
However, Richard Paris-Smith, client service leader at Strategic Risk Solutions (SRS) Guernsey, says: “We are finding that the formation of new captives in Europe is slower than offshore domiciles such as Guernsey, but there are still new captives being formed. There has been significant growth and interest in captives in mainstream onshore domiciles, notably France, which are adopting captive friendly regulations.” Looking forward, he adds: “The market will continue to expand, both in terms of numbers of captives and, perhaps more gradually, the increased output of premium and risk into existing captives.”
French entry
France’s new captive legislation allows captive insurers and reinsurers to accumulate tax-free reserves of up to 90 per cent of underwriting profits in the form of a ‘resilience’ provision that can be drawn on in the event of a disaster.
AM Best predicts that the number of captives licensed in France will increase, as the French risk management association (AMRAE) has identified more than 50 French corporations with plans to set up a captive in the country.
SRS Guernsey’s Paris-Smith comments: “We’ve seen a number of new formations in France recently, as well as existing companies moving to France.
This is likely due to pent-up interest in France generated while the country was developing its new captive legislation.”
On 8 December 2023, The Presidential Supervision and Resolution Authority (APCR) issued licences to two captive insurance companies, RD3A, owned by Rubis Energie, and agricultural industrial group Avril, for its reinsurance captive Avril Re. This takes the total number of captives in France to 16, affirming that French captives are on track with the expected growth trajectory.
Commenting on the legislation, Marine Charbonnier, head of underwriting, captives and facultative for APAC Europe at AXA XL, says: “The new regime is an important first step for captives in France, where a whole ecosystem could develop in the future. The work done by public authorities to materialise the revival of reinsurance captives has been well received by the market.”
The captives licensed so far by the French authorities have been primarily focused on large multinational companies, although Charbonnier notes that “by expanding the scope of eligible companies, the new legislation also makes captives more accessible to medium-sized companies”.
AXA XL has many clients in France that may redomicile to their home country in the future.
UK to follow suit
The end of 2023 saw the UK chancellor announce the government’s plans to consult on a UK captive regime, set to launch in spring 2024. According to chancellor Jeremy Hunt’s autumn statement, released on 22 November, the UK captive regime aims to “encourage the establishment and growth of captives in the country”. Industry lobbyist London Market Group (LMG), which has been working with the Treasury to achieve this, revelled at the announcement. The LMG is a body representing the city’s commercial (re)insurance broking and underwriting communities. The group says it has been encouraged by the levels of interest in the regime so far.
Outlining the potential benefits of a UK captive regime, LMG CEO Caroline Wagstaff, says: “London is a global centre for risk transfer — but to retain its leading position it needs to have all the tools in the toolkit.” Currently there are no captives based in the UK, because regulators treat them the same as an insurance company, despite these posing a comparatively lower risk to the overall financial system, and their potential to help companies manage their own risk profile more effectively. Wagstaff adds: “A UK captive domicile will offer participants an extensive financial services ecosystem; London-based global brokers with considerable captive consulting experience, a range of local banking and asset management options and the world’s ‘largest and most sophisticated’ reinsurance market.”
In August 2022, Marsh estimated that 200 new captives had been created between 2020 and 2021 by their business alone. All UK public sector bodies base their captives offshore, and “could be encouraged to return to the UK when a competitive UK regime is created for taxpayers”, Wagstaff affirms. “More companies might also be able to consider the option of a captive if they could locate it onshore in their own domicile”. Significantly, decision making on the captive must be made within the jurisdiction where the captive is located. Therefore, it will create new business in sectors and jobs in captive management, as well as enabling UK captive owners to be geographically closer to their captive’s operations. The LMG’s 2022 ‘A Plan For The Future’ report advised how a captive regime will succeed in the UK. It notes that a failure to develop an activity-specific model of regulation will mean that London will continue to lose out to other financial centres in relation to alternative risk transfer products. The group recommends that the Prudential Regulation Authority (PRA) works with the government to create captives and develop specific guidance for them. The report was published one year on from its original 2021 report, which outlined a five-point plan to boost the London insurance market including promoting a UK captive market.
Although some industry participants have expressed delight at this announcement, others are wary it will not come into fruition given the uncertainty surrounding the outcome of the next UK general election, which is expected to be held at the end of 2024.
Taking a wider view, interest among European risk managers for local captive solutions has been growing over the past 12 months. AXA XL’s Charbonnier says: “There are discussions now underway in Italy and Spain, where Italy’s national association of risk managers (ANRA) and the Spanish equivalent (AGERS) are respectively working to establish more appropriate captive regimes.”
Established in Europe
Traditionally, the main European domiciles for captive insurance are Luxembourg, Ireland and Malta, as well as Guernsey, which sits outside of the jurisdiction of the EU. According to AXA XL’s Charbonnier, Europe’s historic captive domiciles remain popular. Amid new domiciles coming online, it will nevertheless take time for those markets to mature, especially in terms of regulation, structuration and skill set. Therefore, traditional ‘tried and tested’ domiciles remain safer options for setting up a captive now. At the beginning of 2023, Guernsey became the largest captive domicile in Europe, a position it still holds.
SRS Guernsey’s Paris-Smith says: “Captive use is expanding in Guernsey with new company and cell formations. There’s a higher turnover in cell companies compared to single-parent formations. I estimate 75 versus 25 per cent for cell companies compared to the standard. The reason is that cells are quicker and easier to move into, to some extent.” He continues that setting up a captive insurance company can be intimidating and recommends starting by using a cell that new companies may subsequently convert into a standalone company. Captive Insurance Times looked at the proliferation of cell captives and the benefits they can provide in its December 2023 issue.
Commenting on the state of captive play in SRS Guernsey’s Paris-Smith says: “We’ve witnessed a lot of interest in captives over the last two or three years, driven by the hard market. We’re on the tail end of that now, with signs that the market is starting to ease, but the interest and disciplines created won’t disappear overnight. In fact, they will be sustained and developed over the long-term.” The impacts of these market conditions are still a key reason as to why companies are looking to utilise captive self-insurance. Following this, Paris-Smith has observed a shift, where those that have set up captives as a short-term response to hard market conditions are now thinking about how captives can contribute to their companies’ longer-term strategy.
SRS Guernsey’s Paris-Smith asserts that the jurisdiction welcomes any new captive domiciles, including the UK, as mainstream domicile development of captive friendly legislation further legitimates their role as a self-insurance vehicle.
ESG in style
Witnessing trends in the European captive markets, AXA XL’s Charbonnier says: “Increasingly, clients are also including ESG information in their risks analysis for dedicated solutions, which is welcomed.” Captives are well-positioned to act as a key point to identify ESG challenges and help a company’s strategy for addressing them by providing an avenue for parent companies to integrate sustainable practices into their risk management strategies. Globally, companies with a captive have higher than average ESG risk rating scores, according to insurance broker and risk advisor Marsh. The company affirmed this finding by analysing data from its ESG risk rating tool, launched in March 2022.
On the other hand, SRS Guernsey’s Paris-Smith notes that in the commercial market, there are ESG concerns regarding certain types of industries, such as fossil fuels. He is seeing captives being used to create increased risk retention for these companies, where market capacity is not supporting them, and for them to access specialised reinsurance. Paris-Smith says: “I think sometimes traditional markets can have a binary view on ESG, despite some of these companies having strong ESG strategies in place, they are struggling to retain risk and are being driven to captives as an alternative.”
A number of European energy companies have captives, such as Enel S.p.A, an Italian multinational electric utility company. It recently transferred assets from its old captive, Amsterdam-domiciled Enel Insurance N.V., to its new single-parent reinsurance captive, Enel Reinsurance – Compagnia di riassicurazione S.p.A., domiciled in Rome. In 2022, Enel Insurance N.V. became the first signatory of the UN Principles of Sustainable Insurance.
Solvency II boost
The EU Council and the Parliament reached a provisional agreement on amendments to the Solvency II directive in December 2023. The directive is the EU’s main piece of legislation in the insurance area. It is an EU law that codifies and harmonises the EU insurance legislation, all insurance entities have to follow its rules for their insurance market. Since Brexit in 2016, the UK has reformed Solvency II to ‘Solvency UK’. The reforms, proposed by the UK government in November 2022, aimed to reduce risk margins and liberalise eligibility criteria for companies.
According to AM Best, “Solvency II amendments, expected to come into force from January 2026, should lead to a more streamlined, proportionate and risk-based prudential process for EU-domiciled captive entities”.
The rating agency has found that one proposed item of particular interest to captives and captive owners is the application of proportionality. Under Solvency II, the principle is applied to ensure that the practices taken by supervisory authorities are proportionate to the nature and size of the risk in the business of the insurer and reinsurer. “As captives are often small and have lightly staffed operations, this principle of proportionality is of particular importance ensuring that the regulatory requirements do not become overly burdensome,” the rating agency says. The council expects new rules on Solvency II to boost the role of the insurance and reinsurance sector in providing long-term private sources of investments to European businesses. These legislative changes are set to facilitate the further growth of captive insurance in the region.
