Sunday, April 21, 2024

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Europe’s 2023 captive highlights: More domiciles, PCCs, risk portfolios broadening


  • Germany, Spain, UK to follow in French and Italian footsteps?
  • Solvency II reforms, hoped to help proportionally, expected in January
  • Cell popularity has soared, more domiciles considering PCC legislation
  • Less traditional risks such as cyber more commonly being written in captives

The growing captive trend seen across Europe could create a further “echo” across the continent, with more countries in the region looking to introduce their own captive legislation in the coming years.

The 2023 narrative has been dominated by France, confirming its long-awaited reinsurance captive legislation at the turn of the year, with Italy grabbing the headlines in the last month with its first captive licence.

There has also been murmurs that countries such as Spain or Germany could follow in the footsteps of France and Italy within the coming years, while the UK government has committed to holding a spring consultation on a new captive framework.

When the 2023 statistics are released in the first quarter of next year, they are expected to signal continued pure captive growth, but there has also been an uptick in the number of cells being utilised across the continent, supporting those calling for more EU domiciles to introduce Protected Cell Company (PCC) legislation.



The size of captives in Europe is also getting bigger with many companies looking to add additional lines to their existing captive programmes.

Property and liability continue to be the most popular lines of business, but there is growing interest in writing less traditional lines such as cyber due to rising costs and a lack of capacity in the commercial market.

Difficulties surrounding Solvency II compliance continue to rumble on, especially in regard to regulatory proportionality, but long hoped-for reforms, expected to be published in January, may provide some relief to EU-domiciled captives.

More European domiciles

When the French government introduced its regulatory framework for captives, that included an equalisation reserve, at the start of the year, there were optimistic predictions about the amount of new activity it would promote, and momentum has gathered throughout 2023.

Last week, petroleum, gas and chemicals company, Rubis Energie received a licence for a reinsurance captive from the French regulator, while Agro-industrial group Avril also received a reinsurance captive licence from the ACPR last week, taking the number of active captives in France to 16.

There have now been six captives licensed in France this year, and Captive Intelligence understands a seventh is expected to be approved before year-end.

Although Italy does not yet have specific captive legislation, Enel S.p.A., became the first captive to be licenced in Italy, receiving a reinsurance licence from the Italian regulator IVASS on 21 November, with Aon and local law firm Bonelli Erede supporting the project.

“Now the path is traced other groups will follow us, and other captives will soon be set up in Italy, simulating a more conscious approach to the risk management and risk financing activities, especially in moments of market hardening as the one we are living today,” said Gabriele Frea, head of insurance and risk financing at Enel, in a Global Captive Podcast episode to be released in January.

Earlier this week, multinational cable specialists Prysmian Group SpA received its authorisation for Italy’s second captive reinsurance company, which it plans to merge with its existing Dublin captive.

Captive Intelligence understands Prysmian Riassicurazioni will be self-managed with Alessandro De Felice, chief risk officer at the parent group, appointed CEO of the captive.

Vittorio Pozzo, director for WTW’s Europe & Great Britain captive advisory team, said that if EU countries like Italy are licensing such high-level captives, it means they recognise the value they bring to the local insurance industry, and the wider local environment.

“This echo could be shared with many other countries in Europe, which might not be as big as Italy, Spain, Germany, and so forth,” Pozzo told Captive Intelligence.

“I believe that what has happened over the past two or three years is going to create an echo in Europe, which could boost the understanding of the value of captives for risk financing purposes.”

The UK government announced last month it will launch a consultation on the design of a new captive framework in spring 2024, with the aim of “encouraging the establishment and growth of captives” in the United Kingdom.

In September, a delegation of captive specialists met with the UK government’s previous City Minister, Andrew Griffith MP, at the Treasury to discuss the potential introduction of a captive regime.

“We’re observing and we are actively involved in a number of these new domiciles and obviously, keeping an eye on what’s going on in the UK, and the more the merrier,” Lorraine Stack, international consulting leader at Marsh Captive Solutions, told Captive Intelligence.

Yannick Zigmann, managing director of Luxembourg-based Risk and Reinsurance Solutions (2RS), said there will be many captive opportunities in Germany soon, highlighting that 2RS had recently set up two captives for two different German companies.

“We trust that there is a big growth opportunity for captives in Germany, because the country has more than 1,000 companies with turnover over €1bn, and they are all seeking protection or cheaper insurance,” he said.

Zigmann also highlighted Spain as a potential growth opportunity and there has been growing discussion around the country’s appetite for captives.

“We want to expand, and we have a project to open an office in Madrid, and this is something we are seeking for next year because we want to be closer to our clients,” Zigmann said.

“We have heard that some people are thinking about changing the (re)insurance situation to be able to offer captives in Spain.”

It can often take time for countries to develop the understanding and confidence in the captive concept.

Vittorio Zaniboni, captive and insurance excellence leader at EY Luxembourg, told Captive Intelligence: “It can also take time for governments to understand that fiscal optimisation might be one consideration for potential captive owners, but for those wanting to form a captive for the right reasons, it is not the key.

“If we go to Belgium, the regulator is pushing back the concept and is very inquisitive about any entity whatsoever linked with captives.”

PCCs

The use of cells in Europe has become more popular this year, but there is limited choice when it comes to domiciles within the EU that have specific PCC legislation. Malta is the only EU captive domicile that has PCC legislation in place.

More broadly in Europe, Guernsey, Gibraltar and the Isle of Man all facilitate cell business, with Guernsey a particularly popular option.

Pozzo said the increase in the interest in cells is a positive sign regarding the recognition of the value of captives.

“This is another positive sign of the fact that organisations that are maybe not a large enough to justify a standalone pure captive can approach the captive universe with a tool that is easier to set up and less expensive,” he added.

He said we should not be surprised that there is a lot of interest in PCCs.

“EU countries, generally speaking, do have large corporates, but also a bunch of middle market corporates, which would need to have their own cells,” Pozzo said.

There have also been rumblings that domiciles such as Luxembourg could look to introduce cell legislation, but it is unclear how it would work alongside the country’s equalisation provision.

Valerie Scheepers, head of the non-life and reinsurance department at the Commissariat aux Assurances, previously told Captive Intelligence 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.

Mike Matthews, international commercial director at Artex Risk Solutions, told Captive Intelligence last month that one of Dublin’s largest shortcomings as a domicile is its lack of cell company legislation.

“I think one of the big failings in Dublin, and lots of commentators have touched this over the years, is the lack of protected cell legislation in Ireland.”

He said the main challenge for introducing cell legislation in the jurisdiction is linked to Solvency II mechanics, “especially where core assets can be exposed, unlike other domiciles where they typically do not have access to core funds”.

“For a PCC cell to meet the Solvency II minimum capital requirements, it still needs to be able to leverage that core capital, so that it does not need to have the minimum level of capital itself,” Matthews added.

Solvency II

The regulatory quagmire of Solvency II compliance since its introduction in 2016, and its capital requirements, has discouraged certain companies from considering EU domiciles in recent years.

Legislators in the EU have now come to agreement on reforms to Solvency II, which is hoped to include additional proportionality for EU-domiciled captives.

The Solvency II review has been ongoing on for more than two years with FERMA, ECIROA and other captive stakeholders lobbying legislators hard for greater proportionality to be applied to “low risk undertakings”, including captives.

The EU announced on 15 December an agreement between member states on various reforms to Solvency II, but only a passing mention was given to proportionality with limited detail.

The full text is not expected to be published until mid-January at the earliest.

“I saw that there are a few changes ongoing in the Solvency II arena, which is normal, and I would say it is critical that it changes, because if you make regulations like Solvency II, and you keep it the same as 10 years ago, they’re not fitting their objectives anymore,” Francoise Carli, founder and CEO of Zakubo Consulting,” told Captive Intelligence.

“I am happy to see that there are changes to come. I wait for it to be written and engraved in marble before I will be happy, because sometimes the objective is good, but when you get to the final text, it’s not so easy.”

Lines of business

Property and liability continue to be the most popular lines for captives, but companies have been increasingly looking at captives to write lines such as cyber and directors and officers due to the distressed commercial market.

“Cyber is becoming more attractive, and we are seeing a lot of clients saying that they really want to get to grips with understanding their underlying cyber risks and are going to dip their toes in the water this year,” Pozzo said.

The risks clients will be looking to place in captives over the next year may largely be dependent on how the commercial market is behaving.

“If the market is continuing to be tough, the traditional property and casualty classes will always be on the on the table, as well as the non-standard classes like cyber,” Matthews said.

“I also think there is going to be new lines which could be spotted, and aviation is an example.”

Pozzo added that we could also see more severe risks such as political risk and war being written in captives.

“Even if captive owners should be cautious with these high severity risks because of the potential impact that some unpredictable losses could potentially have on the captive.”