Monday, February 26, 2024

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Domicile Wars: Switzerland has infrastructure to be top domicile, lacks self-promotion


  • Recent law revision allows captives to benefit from some regulatory relief
  • Large European corporates biggest user of the jurisidiction
  • Switzerland has more flexibility than EU domiciles, being outside of Solvency II
  • Absence of self-promotion hinders Switzerland’s growth and reputation

Switzerland has all the infrastructure to be a leading European captive domicile, but the jurisdiction could benefit from greater self-promotion on the international stage.

The country is recognised by most as being a highly sophisticated (re)insurance hub with a stable political and economic environment.

Switzerland also has a highly developed legal system, a strong insurance and financial services industry, and a skilled workforce with access to specialist expertise and services.



A number of the world’s largest commercial carriers such as Zurich and Swiss Re are also headquartered in the jurisdiction.

Lionel Tanner, managing director at SRS Europe, told Captive Intelligence that most captives domiciled in Switzerland are writing property and casualty business, though many are also adding lines such as employee benefits.

“I am also aware that some captives reinsure risks such as directors and officers, professional indemnity, credit insurance, or cyber,” he added.

The domicile’s 45 captives are largely owned by European companies, with a quarter owned by Swiss businesses. Italian, French, Dutch and Belgian companies are the next largest contingent.

In 2008, Italian multinational oil and gas company, Saipem formed its Switzerland-domiciled captive, Sigurd Rück AG.

“We analysed different domiciles mainly in Europe, and that included Dublin, because our parent company decided to register there, then Luxembourg, then Malta, and then I even travelled to explore the United Arab Emirates as a potential captive domicile,” said Daniele Zucchi, managing director at Sigurd Rück.

Zucchi revealed that the final two countries that were in contention were Switzerland and Luxembourg.

“We did not really like the part of the regulation in Luxembourg where if we have to wind up the company, then we have to leave the reserves inside the country for quite some time,” he explained.

“We decided to go for Switzerland because of course being a reinsurance captive, we did not need to be in the European Union for the freedom of services.”

Saipem also already had a registered company in Switzerland.

“So, we actually moved into the same offices, and we share facilities and a lot of the same functions,” he added.

In December 2022, STMicroelectronics received a licence from the Swiss Financial Market Supervisory Authority (FINMA) to form its captive, STMicroelectronics Re SA (STReSA).

STReSA began by providing $10m of reinsurance capacity under ST’s property damage and business interruption (PDBI) international insurance programme from 1 January 2023.

Since the beginning of 2024, the captive also underwrites a $10m line under ST’s group general and product liability international insurance programme.

“Amongst the possible domiciles for a captive, we immediately excluded from the potential list all options which a domicile might be considered as a fiscal haven,” Maurizio Micale, general manager at STReSA, told Captive Intelligence.

He said it was decided that Switzerland was the ‘natural’ domicile for the captive.

Micale added that as far as the STReSA project is concerned, ST’s experience working with the regulatory regime, in conjunction with STReSA’s captive insurance managers, has been very supportive and positive.

Regulation

Switzerland is not part of the EU and therefore is not required to follow Solvency II regulations, although it is considered a Solvency II equivalent regime.

“That gives the supervisor a chance to be flexible in terms of proportionality,” Zucchi said.

“The supervisor since a long time has implemented flexibility and proportionality for different sized companies.”

At the start of the year, the government revised Switzerland’s Insurance Supervision Act, which recognises both insurance and reinsurance captives while providing some regulatory relief.

“These developments not only acknowledge the importance of captives to the Swiss economy, but also allow for a more flexible and considered approach to strategic decision-making,” Emma Sansom, group head of captives at Zurich, told Captive Intelligence.

“In addition, the much more limited impact a failure of a captive would have to a Swiss insured than a much larger insurer is taken into account.”

Sansom said with these measures introduced, Switzerland can become more attractive for captives who would have potentially been put off by high entry thresholds.

“That’s not to say existing and prospective captives aren’t held to a high standard under the new regulation, of course they are – that’s the famous Swiss mark of quality,” she said.

“But by taking a more proportional approach, the captive industry can become leaner, more agile, and more able to innovate to meet the changing needs of the parent organisations whose risk landscape is evolving at rapid pace.”

Matthias Rittmeier, senior captive insurance consultant at Marsh Captive Solutions, said there are some useful elements in the recent changes, but it is now more standardised, so there are less exemptions available.

For example, up until 2023 FINMA had the authority to grant a waiver allowing exemption for some smaller captives from an internal audit function.

“A new law has since come into force this year so now every captive, no matter how small it is, has to set up an internal audit function,” Rittmeier said.

“It doesn’t mean it has to be complex, but that exemption has been removed and a client now has to apply for it specifically, and FINMA does it on a case-by-case basis.”

Unlike some domiciles, captives in Switzerland can add lines of business without much interference from the regulator.

“A reinsurance captive enjoys some flexibility in adding new lines of business to its existing portfolio with minimum burden in the regulatory actions to be undertaken in that sense,” Tanner said.

The minimum capital required for an insurance captive in Switzerland is CHF3m ($3.4m), which can be considered significant compared to other domiciles.

“It’s not going to be an invitation for smaller captives like cells where they have a small retention of a $500,000 layer, but generally, the captives that come to Switzerland are reasonably big,” Rittmeier said.

“I’m not saying that all of them are large captives, but those that come here are large enough to justify the CHF3m.”

Barriers to growth

A lack of self-promotion by FINMA and other stakeholders has been highlighted as a key factor restricting the growth of the domicile.

“We have very good conditions, but if we include the regulator and ourselves, we are not good enough at promoting it sufficiently and Switzerland always gets a little bit lost in the choice,” Rittmeier said.

“We naturally talk about Luxembourg and Malta when we’re thinking about Europe, but there might even be a good business case to go to Switzerland, but it sometimes gets forgotten about.”

Micale said FINMA should be better at promoting itself and Switzerland as one of the most favourable domiciles for captives because of the stability of the Swiss political environment and legal system.

“As well as the economy and for the reputation of the insurance and financial services ecosystem.”

There is also growing competition from a greater number of domiciles contesting for captives, especially across Europe with the emergence of a France, Italy and a possible UK captive regime.

Tanner said that although competition between domiciles is on the rise, he strongly believes that the Swiss environment is beneficial to captives.

“The country offers political and economic stability, a pragmatic regulatory environment, the access to insurance know-how, and the country has four different national languages plus English which is commonly used in a business environment,” he added.

Sansom said competition from other newly established or potential domiciles such as France, Italy and the UK is going to create “waves” in the industry, and not just for Switzerland.

“Onshore captive domiciles are attractive for a variety of reasons, however it could be said that these new domiciles are still finding their feet so have less experience and resources to engage with potential candidates, and generally these new domiciles are legislating around quite restricted, shorter-tail lines of business as they test the water,” she added.

“Over time this may change, but at the moment Switzerland has an advantage because it has significant experience and resources available to it to service existing and potential captives.”

Switzerland is also often considered an expensive location to domicile a captive compared to other jurisdictions.

Local captive owner Zucchi said: “Some people say Switzerland is a very expensive environment, which may be true, but honestly, I do not believe that Luxembourg is much less expensive than Switzerland, so it might be true for certain domiciles but not for all of them.”

Sansom said it would be remiss of her to not mention sustainability and ESG, which she said is a challenge for all jurisdictions.

“However, and, I can verify this as someone who has recently moved to the country, Switzerland has tackling these issues written into its DNA,” she said.

“It is clear to me that FINMA has a focus on risk management and governance structures in particular around cyber security, so whilst this could be considered a challenge from a pure financial perspective, I actually see it as a positive proof point of the commitment that Switzerland is making to the topic of sustainability.

“I believe that captives have the ability to make a meaningful difference in this space by enabling their parent organisations to understand and mitigate ESG risks, in order to meet sustainability objectives, as well as enable a transition to net zero, so the approach by Switzerland on the topic really promotes this ethos.”