Tuesday, May 21, 2024

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Domicile Wars: Sweden presents unique domicile characteristics within Solvency II

  • Mostly home to domestic, Swedish-owned single parent captives
  • Captives in Sweden can write direct, reinsure and utilise a contingency reserve
  • Swedish law does not enforce IFRS 17 reporting standards
  • Formation costs in Sweden considered expensive

The utilisation of captives in Sweden and the Nordic region more widely is expanding as more organisations are made aware of the risk financing benefits.

Although captives have existed in Sweden since the 1970s the jurisdiction does not have specific captive legislation in place, with Solvency II providing the regulatory framework.

The domicile benefits from allowing captives in the region to write direct insurance and provide reinsurance, a contingency reserve similar to Luxembourg’s equalisation provision, and not enforcing IFRS 17 reporting standards.

The costs of forming a captive in Sweden and the length of time it can take to launch have been cited by some as the main concerns prospective captive owners have when it comes to domiciling in the jurisdiction.

Increasing captive utilisation has been part of a global trend over the past five years, but they have only recently begun to have wider appeal in Sweden and the wider Nordic region.

“We in the Nordics are a bit later than other countries, and this was the same with the hardening market,” Tomas Persson, head of captive and insurance management at Aon Sweden, told Captive Intelligence.

“It came to Southern Europe a lot earlier than it came to the Nordic market, and now it has come to the Nordic market a few years later.”

Hanna Andrén, operations manager, vice president at Marsh, said the intermediary had seen a wave of increased demand for new formations, both locally in Sweden and in the other Nordic countries.

Alexander Dahlmann, CEO and head of office at Marsh Sweden, said there is often a lack of knowledge in the local market when it comes to captives and how they can best be utilised.

“Therefore, one of our focus areas at Marsh has been and still is to educate the market to make captives more visible so that companies understand the value they can bring,” he said.

“This has been an eye-opener for many companies and at Marsh we are seeing a huge increase in demand.”

Dahlmann said he often has conversations with large companies in Sweden who are interested in learning more about captives and how they can be used by their organisation.

“A big driver for this is the hardening market, companies are struggling to find insurance at a reasonable price with the right terms and conditions etc, so alternative risk solutions, such as captives, are often an attractive option in this case,” he said.

The majority of captives domiciled in Sweden are owned by Swedish companies.

“We have at least one that is based in South Africa, and one in Poland, but apart from that they are mainly Swedish owned captives,” Persson said.

Sparbankernas Försäkrings AB is a group captive domiciled in Sweden that was formed to help savings banks based in the country with their insurance costs.

“The captive is not belonging to any group as such,” Karl-Ove Andersson, managing director at Sparbankernas Försäkrings AB, told Captive Intelligence.

“It is not consolidated with only one shareholder, it has 57 shareholders, which is all of the Swedish saving banks.”

Andersson said most smaller savings banks in Sweden have faced problems finding insurance in the commercial market so decided to form the group captive.

“The saving banks could find some big buyer advantages by doing this together, especially on the reinsurance side,” he said.

“They have a strong and long tradition of risk management and loss prevention work, and the commercial market did not pay off for the strong loss result and loss prevention work.”

The group captive writes lines of business commonly associated with banking including crime, professional indemnity, liability when the bank is acting as an insurance intermediary, as well as property, and some business interruption cover.

Andersson said one line that is on the agenda but not currently written in the captive is cyber.

“We have not included cyber within our programme,” Andersson said. “The banks, of course, have cyber insurance, but they are outside the programme.”

He said another important area for the captive to consider in the future is employee benefits.

Andersson said an alternative domicile to Sweden was never considered as the 57 saving banks are all located in Sweden.

“The saving banks are mostly active in smaller communities and are a strong part of the local society,” he said. “It is absolutely logical and natural to domicile within Sweden.”

Benefits of Sweden

Dahlmann said the main benefit of having a captive in Sweden is that an insurance company in Sweden is treated like any other company in the country.

“A company can consolidate the results of their insurance company, which is a captive, into the company’s result,” he explained.

“Hence, if the parent is a Swedish company or if they have a Swedish owner of that captive, if the parent is losing money but the captive is making money, they do not have any taxes to pay because it’s all consolidated upward.”

Captives domiciled in Sweden can write both direct insurance and reinsurance business.

“Sweden allows for the possibility for direct captives or reinsurance captives or even both, so we are pretty flexible from a Swedish Financial Supervisory Authority (FSA) perspective,” Dahlmann said.

“A captive just needs to have a business case to convince the FSA that being both a direct and indirect insurer makes sense from their perspective.

“It’s not like in Luxembourg, where if a captive wants to have all the benefits, they need to be a reinsurance captive.”

Reinsurance captives are allowed to use a contingency reserve which is similar to the equalisation reserve used in France and Luxembourg.

“It is similar to the equalisation reserve in Luxembourg, but it is not the same,” Persson said.

It is beneficial from a tax perspective, but it is not mandatory.

“A company can distribute the profit if they like instead, or they can use the contingency reserve and then keep it there to build up capital,” Persson said.

Andrén said that although it is optional, many companies have chosen to use the contingency reserve as it can be beneficial both for the individual captive and from a group perspective.

Sweden does also not require captives domiciled in the jurisdiction to use IFRS 17 reporting standards.

“IFRS 17, which is a very onerous piece of legislation, is not mandatory for insurance and reinsurance companies in Sweden which makes the management of the captive easier and saves a lot of costs,” Andrén said.

Insurance companies are categorised into three levels in Sweden, and the higher the level, the stronger the requirement for the separation of central functions.

Captives are generally either Level 1 or Level 2.

Level 2 are medium-sized insurance companies with a less complex offering and a gross premium income between 250m SEK ($23m) and 1bn SEK ($93m), as well as insurance companies with life insurance commitments and a balance sheet total below 100bn SEK.

Level 1 encompasses smaller insurance companies with a simple product portfolio and a gross premium income below 250m SEK.

“There are three tiers, and captives are tier three, which means that the FSA understands that if a captive goes bankrupt, it won’t impact consumers,” Dahlmann said.

“The only person or entity that would be impacted is the parent company. So that’s why they just want to make sure that you’re following the solvency regulation.”

Costs and timelines

The expense of forming a captive in Sweden has been raised as one drawback.

“The licence fee to the FSA is 1.4m SEK (€125,000), which is more costly compared to many other domiciles,” Andrén said.

“However, we have not found this to be an issue as our clients are often very large Swedish groups with the intention that this is a long-term commitment.”

Dahlmann said that cost is common discussion with clients.

“We’re asking, ‘Are you here just for short-term profit or a one-year captive, or are you in it for the long term?’”

“Because if it’s the latter, €100,000 is a small return,” he said. “That’s the point we’re trying to drive home.”

Dahlmann said although the FSA costs are expensive in Sweden, the actual project costs are much lower compared to other domiciles.

“I believe Sweden is a more cost-effective country for managing this kind of project, especially considering that the Swedish krona has depreciated by 25% compared to the euro over the past two years,” he said.

The time it takes to form captives in Sweden may also be an issue for some companies.

“The processing time for setting up a new captive is between five months and a year,” Andrén said.

“Our experience is that it can take up to a year from the planning stage to obtaining the licence.”

Persson said that occasionally clients desire a quick setup for their captive, “especially if they’ve recently had a terrible renewal experience”.

“If they want it done promptly, they might consider another domicile, although I haven’t heard anyone explicitly state that if it takes too long, they will set it up elsewhere.”