The utilisation of existing captives is rising as a consequence of the hard commercial market, according to a recent AM Best Market Segment Report.
In the Report published on 6 November, the rating agency said several captives have increased their participation on existing covers, as well as expanded into new lines of business as their parents have looked to increase captive utilisation and diversify portfolios.
The hardening cyber market has led to more captives writing this risk, with commercial market cover often being expensive and restrictive.
There has been an overall uptick in the number of captives domiciled in Europe, as existing domiciles remain popular, and other jurisdictions put in place legislation to attract new captives.
More captives were licensed in 2022 than closed, and AM Best said there are indications there will be further growth in 2023.
The ratings agency also said that while the hard market provides opportunities for captives, it also presents challenges.
Many captives are dependent on reinsurance capacity to be able to offer large limits required by their parent groups.
The reinsurance market has trailed the commercial market in terms of price increases in recent years, but with significant catastrophe losses and inflation in 2022, reinsurance is now in a hard market.
As a result, captives have faced price increases for their reinsurance programmes in the 2023 renewals and many increased their retentions.
Solvency II
A review of Solvency II enacted by the European Commission (EC) in 2020 is currently on-going, and there is one potential alteration concerning the principle of proportionality which will be of interest to captives.
Under Solvency II, the principle of proportionality is currently applied to ensure that practices taken by supervisory authorities are proportionate to the risk of the insurer and reinsurer.
As captives are often small and lightly staffed operations, this principle of proportionality is supposed to ensure that regulatory requirements do not become overly burdensome.
The EC has acknowledged that this high-level principle has been “insufficient” in reducing the regulatory burden for small insurers.
The EC proposals aim to address this by introducing specific proportionality measures that can be applied by low-risk profile undertakings automatically and by other insurers after supervisory approval.
“This should lead to a more streamlined, proportionate, and risk-based prudential process for captive entities,” AM Best said.
IFRS 17
European captives reporting under International Financial Reporting Standard (IFRS) are currently working to implement the transition from IFRS 4 to IFRS 17, which came into effect on 1 January 2023.
AM Best has noted varying levels of readiness for IFRS 17 implementation among captives.
“Some started the project early and have reported quarterly numbers to their parent under IFRS 17 since the first quarter of 2023, while others started later and are working towards being ready for the year-end 2023 reporting deadline,” AM Best said.