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Legislation could prompt more Italian captive activity

  • Italy’s first two captives licensed with more expected to follow
  • Time required to educate IVASS on captive regulation
  • Solvency II proportionality reform could push captive numbers

A swathe of new captives could form in Italy if the Italian regulator introduces specific legislation.

Under current laws, captives are generally regulated under the same legislation as traditional carriers, which can be onerous for smaller insurance companies such as captives.

Enel Erre, owned by Italian multinational Enel, became the first captive to receive a reinsurance licence from the Italian regulator IVASS on 21 November.

Enel’s Italian captive completed the merger with its existing Netherlands-domiciled captive, Enel Insurance NV, completing the re-domestication process and being assigned a financial strength rating of ‘A-‘ (Excellent) by AM Best.

In December, multinational cable specialists Prysmian Group SpA received 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.

“Being domiciled in the same jurisdiction as its parent can bring benefits for a captive in the form of geographical coherence and operational synergies with the parent,” Andrea Porta, financial analyst at AM Best, told Captive Intelligence.

“Captives are often lightly staffed and work closely with staff from the insurance divisions of the parent companies.”

The formation of Italy’s first two captives comes as Italian companies increasingly look towards alternative risk transfer methods to counter premium increases, higher deductibles, and a lack of capacity in the commercial market.

“This has brought about a discussion on how we can support them to mitigate the current hard market conditions, and one of the most obvious ways of doing that is to retain part of the risk and being able to access reinsurance capacity,” said Karl DeGiovanni, director of client solutions, EMEA at Aon.

Professor Albina Candian, lawyer, partner at Studio Legale Candian, Professor Marco Micocci, actuary, University of Cagliari and Roma Sapienza, Professor Giacomo Pongelli, lawyer, University of Milano-Bicocca, were all involved in advising the formation of reinsurance captives in Italy during the authorisation process by IVASS.

“A captive with a limited number of risks and a simple investment strategy, when it is based in the group’s home country can be considered more economically attractive,” they told Captive Intelligence.

The formation of Italy’s first captives highlights that the importance of captives is increasingly being valued by the Italian regulator.

“There has already been a re-domestication to Italy, and it is not going to be a unique case because I am expecting other cases by the end of the year, and this is proof of at least two things,” Vittorio Pozzo, director, Europe & Great Britain captive advisory team at WTW, previously told Captive Intelligence.

Italy has followed in the footsteps of other large European countries that have recently introduced captive legislation.

“France has set the scene for other European jurisdictions, being the first of the larger EU countries to enact legislation specificly for captive undertakings,” DeGiovanni said.

“It could be said that France has laid down the foundation for others to follow.”

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

Captive Intelligence published an article in December, highlighting that the growing captive trend seen across Europe could create a further “echo” across the continent.

More captives to follow

Gabriele Frea, head of insurance and risk financing at Enel Group, believes “now the path is traced, other groups will follow”. Frea was speaking on episode #99 of the Global Captive Podcast.

“Other captives will soon be set up in Italy, stimulating a more conscious approach to the risk management and the risk financing activities, especially moments of market hardening as the one we are living through today,” he said.

He added that risk managers from other organisations have been in contact and expressed interest in forming or re-domesticating captives to Italy.

“Due to these factors, Italian captives are expected to increase significantly in the very near future,” he said.

Carlo Cosimi, president of the Italian Association of Risk Managers (ANRA), told Captive Intelligence that if there was regulatory change favourable to the management of captives in Italy “we could have a real mass return or formation of new captives”.

“In France, in just one year since the introduction of the new legislation, sixteen captives have already been registered.”

Cosimi said ANRA has previously held introductory discussions regarding captive legislation with the Italian regulator.

“As ANRA we are available at any time to support the regulator or the Italian government in defining a proposal to change the legislation,” he said.

Daniele Zucchi, managing director at Switzerland-domiciled Sigurd Rück AG, owned by Italian multinational oil and gas company Saipem, told Captive Intelligence he is in no rush to consider re-domesticating and utilizing international domiciles remains more than feasible.

“There’s just a couple of captives that registered or re-domesticated for different needs,” he said. “But if you asked me if I would think about it myself [re-domesticating], then probably not, unless of course from a political point of view we are ever asked to do that.

“However, from a strategic risk management point of view for me, the choice we have made to domicile in Switzerland is still very valid.”

Education and regulation

While IVASS is allowing captive formations in Italy, they must comply with the current legislation in place.

This means they are governed under the same regulations as a traditional reinsurer, which can be burdensome.

“The next step is for IVASS to understand that there is an appetite and a desire for companies to do this, and therefore, needs to start considering putting in place a framework that facilitates the setting up, the operations, and also the regulation of captives,” DeGiovanni said.

Discussions with IVASS are ongoing and DeGiovanni explained that several Italian companies are finding it increasingly difficult to find the right insurance cover for their risks.

“Because they are Italian companies, for various reasons, including tax reasons, they have always resisted setting up a captive in another jurisdiction,” he added.

“This might be because they are a public entity, or the risks are limited to Italy and hence one cannot justify setting up a captive (re)insurance entity in another domicile.”

DeGiovanni said there will need to be a process whereby open dialogue with IVASS is possible to help them understand the captive concept in more detail, and ultimately enact specific legislation which includes references for captives.

“If specific captive legislation is passed into law in Italy, there could be a swathe of Italian companies re-domesticating or forming new captives in the country.”

DeGiovanni said it will take some time for regulators that are accustomed to regulating large corporate insurers, to gain the necessary experience to look at captives in a different way.

“However, we are very hopeful that this will happen sooner rather than later”.

Pongelli, Candian and Micocci said specific rules should be provided in line with the principle of proportionality and a risk-based approach.

“The Italian law system already allows IVASS to have the power to provide exemptions in application of the principle of proportionality,” they said.

“We believe it would be appropriate to evaluate a simplification of the authorisation process for (re)insurance captives, adapting the rules on the governance model and the authorisation requirements, differentiating them from the rules applicable to non-captive undertakings.”

The application of proportionality in regulation is one of the items looked at in the ongoing review of Solvency II initiated by the European Commission.

“The move towards greater proportionality may help EU national supervisors to ensure a more streamlined, proportionate, and risk-based prudential process for captive entities,” AM Best’s Porta said.

“As such, it is likely to be one of the factors that now help the push for domestication of captives to European countries, which have traditionally not had many captives.”