- More captive formations expected by end of the year
- French captive owners unlikely to re-domesticate
- Luxembourg could benefit from PCCs, but equalisation provision a barrier
- Replenishment of talent and Solvency II considered key challenges
Luxembourg’s established and attractive equalisation provision, in addition to its long-standing reputation, are expected to maintain the jurisdiction’s popularity as an EU domicile choice for reinsurance captives, despite increasing competition.
There has been concern that the introduction of captive legislation in France could provide stiff competition for Luxembourg, with the French government publishing details of its captive decree in June.
There is also debate on the introduction of protected cell company (PCC) legislation, though a resolution would need to be found as to the mechanism of cells utilising Luxembourg’s equalisation provision.
Like large swathes of the captive industry, as the domicile grows, one of Luxembourg’s main challenges will be keeping hold of talent and developing the next generation of captive leaders.
The country does have an advantageous location at the centre of Europe, while it also benefits from most people in the country speaking several languages.
“It’s an attractive workforce because people are skilled in (re)insurance, and it is in the middle of Europe, so it’s easy to fly over from Germany, France or Spain, for example,” Yannick Zigmann, managing director of Luxembourg-based Risk and Reinsurance Solutions (2RS), told Captive Intelligence.
Luxembourg profits from an “open-minded” captive friendly regulator that understands the nuances involved with regulating captives and processing new formations.
“The regulator has become more attentive to captives in the last few years, but it is still a very open-minded approach,” said Vittorio Zaniboni, captive and insurance excellence leader at EY Luxembourg.
“They understand the peculiarity of captives and they are familiar with the captive concept, which is probably not the same in some other geographies.”
Brian Collins, managing director at SRS, said Luxembourg is “open for business” and the regulator itself is separate from the banking regulator, which benefits the jurisdiction.
“Our regulator understands insurance, understands the risks, and has always had a very pragmatic approach to dealing with captive owners,” he said.
2023 prospects
At the end of 2022, Luxembourg had 195 captives domiciled in the jurisdiction.
Luxembourg has licenced four new captives so far this year and is in the process of licensing four more.
“What is different compared to other years is the fact that licencing applications have also been received in the first period of the year,” Valerie Scheepers, head of the non-life and reinsurance department at the Commissariat aux Assurances, told Captive Intelligence.
“Usually, we have a huge workload in the last quarter, but this year some candidates started earlier because they had already been doing the application process for a long time, and they delivered the file a little bit earlier.”
Scheepers told Captive Intelligence that the regulator has held recent discussions with further prospective captive owners.
Though when it gets to this time of year, Scheepers said it can be “tricky” to deliver licences before year end.
“The new candidates will probably get licensed in the first quarter of next year,” she said.
Former risk manager Francoise Carli, founder and CEO of Zakubo Consulting, said we should not necessarily compare the number of new captive formations to previous years because of a changing economic landscape.
“For some of the players it is a way to better manage their costs, but on the other end, it’s also quite expensive to create a captive,” she told Captive Intelligence.
“Today we have a lot of groups that are looking for short term and not long-term benefits, so I do not think that this number is something you can put a lot of assumptions and conclusions on.”
Scheepers said it takes three months on average to complete a captive application, but that it depends on how well the file has been prepared by the candidate.
“Sometimes we see candidates who during the assessment process will change their business plan, so it starts to get difficult to maintain the deadline,” she added.
Scheepers said there is not a certain sector where the regulator is seeing more captive applications from, and the interest is very broad.
“We have groups working in the logistics sector, we have fashion and design groups, construction groups, and transport groups, so we have a lot of sectors represented,” she said.
German multinational building materials supplier, Knauf, formed a reinsurance captive in Luxembourg in 2021 as a result of hard market conditions.
Marcus Reichel, head of insurance at the company said that Knauf selected Luxembourg as it most appropriately fitted its needs.
“And also because of various other aspects like the quality of knowledge of captive management, and proximity,” he explained on GCP #49.
French competition
There is limited concern about the introduction of French captive legislation and its potential to harm the captive market in Luxembourg.
France now has 14 active reinsurance captives, with four formed in 2023 but there is yet to be a re-domestication of an existing captive to France from another domicile.
The inclusion of an equalisation provision, effectively a deferred tax, which allows captives to build surplus for future claims and build resilience, means the French regime shares similarities with Luxembourg.
The general view, however, is that Luxembourg has a more favourable equalisation provision than France.
Captive Intelligence data shows there are currently more than 50 captives in Luxembourg that are owned by French companies.
“We have the equalisation provision, which is a very efficient tool for a captive, as it allows the captive to have some reserves for bad years as bad years will also happen,” Scheepers said.
Scheepers believes that groups that already have captives in Luxembourg are well-functioning and are “happy”.
“France’s equalisation provision is not totally equivalent to Luxembourg in terms of the length of the equalisation provision, and the type of risk that can be put in the equalisation provision,” she added.
In a recent thought leadership article, François Messner, senior manager at EY Luxembourg, and Hicham Mazouz, partner at EY Luxembourg, said France appears to be more restrictive than Luxembourg, as the latter allows for the use of the equalisation provision by all types of groups regardless of their activities.
Carli said the French situation is a bit “too constraining”, and a certain number of captives will not be able to domicile in France because they are too big, or they do not get enough financial reward.
“They also may not find enough capacity for reserves for future claims, and this is a negative aspect of France as a captive domicile that is going to help Luxembourg stay in place.”
She also said that if the regulator in Luxembourg becomes more “assertive” or more difficult, and at the same time, the French legislation opens to more opportunities, there could be a shift in captives from one country to the other.
“But this will take time because to set up a captive and reach a certain level of comfort takes between three to five years, and the impact, I think will be visible in 2026.”
PCC legislation
The potential introduction of PCCs in Luxembourg has been touted for some time, but the main barrier to any legislation is deciphering how it would work in tandem with the equalisation provision.
“The major issue of PCCs in Luxembourg is how to manage the equalisation reserve, which is the reason it has not been done yet,” Collins said. “Nobody’s come up with a legal solution.”
Scheepers said that PCCs are “clearly on the radar” and the regulator is open to developing new regulation to the extent that there is demand for it.
“We do not want to introduce rules on a theoretical case that will never be used afterwards or that would not be appropriate on a practical case as they are too burdensome or not covering the main risks,” she said.
“We tell everybody that if they are interested, then come and see us and we will see how we can build the regulation together. The worst thing we could do is build regulation that would not be appropriate.”
Zigmann previously told Captive Intelligence that PCCs in Luxembourg would not be successful under the domicile’s current equalisation provision.
He believes there would need to be more flexibility in how the equalisation provision is applied and utilised by cell companies, if at all.
Zaniboni said he has had several interactions with employee benefits clients and prospects for whom a PCC would have been a good solution.
“Still, on the employee benefits side, PCCs have not really been exploited so far,” he said.
“Many potential employee benefit captive clients are put off using a captive because of the complexities of the governance they would need to access the advantages of financing employee benefits.
“The PCC concept could represent a very interesting gateway for attracting corporates that are currently on the fence, allowing them to get access to most of the captive benefits, with a lower level of operational complexity.
“There is a business interest, and I think that Luxembourg could be the right place to promote the creation of PCC set-ups, provided the legislative complexities and limitations are resolved.”
Challenges
The regulatory burden of Solvency II compliance since its introduction in 2016, and its capital requirements have deterred certain companies from considering an EU domicile such as Luxembourg.
However, Zaniboni said the Luxembourg regulator appears to understand the “peculiarities” of captives better than other EU domiciles.
“Captives have had new challenges since Solvency II, but these new challenges are more easily tackled when the captive is domiciled in a country that understands who you are and what you do,” he said.
A review of Solvency II begun by the European Commission in 2020 is ongoing, with one potential alteration concerning the application of proportionality to captives and low risk undertakings.
Finding enough staff and the right talent is also a challenge in Luxembourg and for the wider captive industry.
“Before Covid we had 25 people, and now we have 70 people here in Luxembourg, and it was a real challenge to find the right people and to train them, so we have set up a training programme for our new staff,” Zigmann said.
Zigmann said people are coming to Luxembourg from France and Belgium, for example, so it’s not easy for them to travel or “establish” themselves.
“This is a challenge we must face, and I think that Luxembourg must face to make sure we attract young people in the industry,” he said.
Carli noted that one of the challenges she is noticing is that European regulation is constantly changing.
“Each time what people are trying to improve for a certain number of lobbying captive owners can be troublesome for others,” she said.
“A one size fits all for all the groups, and for all the regulators, cannot work effectively when the world is more and more complex.”