Improved choice and competition by allowing protected cell companies (PCCs) in Luxembourg could create more demand for cell solutions in Europe according to some of the largest captive managers on the continent.
After Gibraltar left the European Union with the United Kingdom post Brexit, Malta is the only EU state that currently has PCC legislation in place, with the concept proving to be popular in the domicile as there are 14 active PCCs today.
A number of captive managers spoke to Captive Intelligence after Valérie Scheepers, head of the non-life and reinsurance department at the Commissariat aux Assurances, said the regulator is open to discussing the possibility of introducing protected cell companies (PCCs) in Luxembourg if there is industry demand.
With Gibraltar leaving the European Union with the United Kingdom post Brexit, Malta is now the only EU state that has PCC legislation. The concept has proved popular in the domicile with 14 PCCs currently active.
Speaking in an interview on episode 82 of the Global Captive Podcast, Scheepers said the onus was industry to present a real business case so rules could then be developed.
Peter Carter, global head of captive insurance management solutions at WTW, said the more jurisdictions that open up to PCC legislation, “the more comfortable and familiar the market could become to these structures”.
Speaking on episode 82 of the Global Captive Podcast, Scheepers said the responsibility was on the industry to present a real business case so rules could then be developed.
“We are absolutely open to the development of new activities if there is a real demand for it,” Scheepers said.
“We have a preference for developing the rules when dealing with practical cases. Otherwise, we have the risk of having an overly burdensome and not appropriate regulatory regime.
“If we have an example, we are really open to analyse it. But as of today, we were not approached with a real case.”
Maxime Schons, managing director at SRS Europe, said that hearing the revelation from the Luxembourg regulator was a surprise, “as it was the first time that we heard about PCC opportunities from the regulatory side in Luxembourg.”
Schons highlighted how clients in the UK or US are generally more used to PCC legislation. “The demand remains really high for new vehicles implementation and whether we deal with captives or cells,” he said.
“The UK and US world is more familiar with cells mechanisms when continental Europe prefers going for captives,” he added.
“With a PCC, you share equity with other members. You have the core on top then you have different compartments, which means you need to share resources, governance key functions, solvency capital requirements.”
However, due to Luxembourg’s strong and established within Europe as a captive domicile, having PCC legislation in the country might boost clients’ appetite for cell structured solutions on the continent.
Carter believes promoters and clients of a Luxembourg PCC would need to consider how the option is differentiated from competing onshore solutions in Malta and offshore solutions from Guernsey and Isle of Man, in order for the domicile to be successful.
Reinsurance captives
One of the challenges in developing an attractive PCC offering in Luxembourg is the fact the regulator is most comfortable, and has a preference for regulating reinsurance captives, rather than direct writing captives which cells are often used for.
“An overly rigid reinsurance only approach could miss out on the opportunity for EU and non-EU sponsors with distributed EU risk looking to passport across Europe and reduce the cost of fronting insurers,” Carter said.
While it is positive that the regulator in Luxembourg is willing to consider the case for PCCs, Claude Weber, managing director and captive consulting leader for continental Europe at Marsh, believes this is only the start of the process, and some legal changes will be required to allow the creation of this structure in the domicile in the future.
“Key decisions need to be taken on the applicability of direct writing entities or only reinsurance entities, the rules to ensure that there would be an absolute protection of all the owners of cells and the owner of the PCC, and the individual taxation per cell or a global taxation of the PCC,” Weber told Captive Intelligence.
Captive manager appetite
Schons said that if Luxembourg introduced PCC legislation, it would not materially impact the way SRS operates, “as we offer either captive solution or PCC solution, only driven by the client’s best interest.”
“Operations remain the same for us regarding the captive management services is just a choice of domicile,” he said.
Carter said WTW has not previously explored Luxembourg PCC options before, mainly because previous talk of a possibility was not followed up with action toward implementation.
“We are always interested in pursuing opportunities arising out of innovation and regulatory change if it can be helpful for our clients,” he said.
“WTW has invested in PCC structures in both Malta and Guernsey, the two largest PCC hubs in Europe.”
Weber said Marsh would certainly welcome another PCC location within the European Union.
“I am confident that Luxembourg will be able to work through these issues and find a viable solution for this project,” he said.