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Luxembourg PCCs could create greater demand for European cells

Luke Harrison
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Luxembourg PCCs could create greater demand for European cells

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.

Malta captive assets surpass €1bn

Richard Cutcher
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Assets under management in captives domiciled in Malta passed €1bn in 2022, according to statistics provided by the Malta Financial Services Authority (MFSA).

One new captive was licensed in Malta last year, while one was surrendered with 10 insurers classed as captives active in the jurisdiction at year-end 2022.

Of those 10 captives, seven are single parent captives and three are protected cell companies (PCCs).

According to the MFSA, captive AuM jumped from €687m in 2021 to more than €1bn in 2022.

Annual premium written by Malta captives increased from €234m to €240m between 2021 and 2022.

The count of 10 captives, however, significantly underplays the domicile’s presence in the European market since there are around 15 other licensed insurers that are wholly owned by corporate groups that would be counted as captives in most other jurisdictions.                                                                                                                             

These insurers, such as Vodafone Insurance Limited several owned by automobile multinational, write a high proportion of third-party business and so the MFSA does not include them in its captive count.

For more captive data on new licence activity around the world and year-end figures, visit the Captive Intelligence data page here.

AM Best affirms ratings of Pfizer captive

Luke Harrison
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AM Best has affirmed the financial strength rating of A (Excellent) and the long-term issuer credit rating of “a+” (Excellent) of Pfizer’s Vermont-domiciled captive, Blue Whale Re.

The ratings agency said the outlook for these Credit Ratings are stable.

Blue Whale provides coverages with significant limits and elevated potential gross exposures per loss occurrence.

During the hard market, Blue Whale has opted to participate in small slices of its CAT tower as an economic efficiency for the group. It also offers capacity for cyber liability coverage when required.

Its net property retentions remain quite substantial. Nonetheless, AM Best said the reinsurance programme is appropriate and diverse, providing ample coverage for all of its lines of business.

AM Best said it recognises the quality of the reinsurers and the substantial financial resources and support available to the captive as part of Pfizer.

Blue Whale’s historical and prospective operating performance are strong with low average loss and minimal expense ratios. However, volatility of key metrics can be low to moderate with its high retentions for low frequency, high severity coverage.

The ratings also reflect Blue Whale’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).

AM Best said: “As Blue Whale insures or reinsures Pfizer’s global property exposures, it plays an important role in Pfizer’s overall ERM and assumes a critical role in protecting the Pfizer enterprise’s assets”

In addition, a negative rating action could occur if AM Best’s perception wanes of Pfizer’s ability and willingness to support the captive.

Hawaii’s captive industry has never been stronger – Matt Takamine

Richard Cutcher
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Hawaii’s captive industry has never been stronger – Matt Takamine

Hawaii’s captive profile has “never been stronger”, according to Matt Takamine, captive practice leader at Brown & Brown, citing continued growth in captive premium volume across the domicile and longevity of the captives in the jurisdiction.

Speaking in a GCP Short released on 23 April and recorded at the CICA International Conference in March, Takamine was joined by David Beyer, director of risk management at Alaska Airlines, and Paul Shimomoto, partner at Hawaii law firm Goodsill.

“Hawaii’s captive industry has never been stronger, 255 captives as of the end of last year,” he said.

“I think we’re the largest jurisdiction for Japanese captives worldwide. We have about 40 of them now.”

Takamine said that while Hawaii’s new captive formation number in 2022 was “not stellar” – 13 new captives were licensed last year – the jurisdiction is predicted to have reached $15bn in total captive premium.

“Pretty stunning,” he added. “That’s an average of about $60m a pop for each one of those 255 captives. So, the industry’s doing well.”

The latest assets under management (AuM) figures provided to Captive Intelligence from Hawaii’s Insurance Division showed captives in the domicile now hold assets of more than $30bn.

In the United States, only Vermont has higher annual premium and AuM volume from its captive portfolio.

Alaska Airlines established ASA Assurance in Hawaii in 2016 and Beyer explained that the captive was established to “create some flexibility in our risk management practice”.

“We canvassed the globe in looking for the right domicile and really Hawaii fit top bill for us in every category that we looked at,” Beyer said.

“It’s got a good regulatory structure, good regulatory reputation as well. And then it’s got a solid slate of top-notch vendors that are on island and able to help us do what we need to do. So we’re very happy with what we have with Hawaii.”

Shimomoto said that while every domicile likes to see large numbers of new formations, such statistics “only tell part of the story of a jurisdiction”.

“Premium dollars and activity like that is important, but I think also longevity is a good indication of how long have these captives been around,” he added.

“In Hawaii we have many captives who were formed back in the 1980s that are still here. Thirty-plus years later, still active and growing and doing great new and innovative things.”

Listen to the full GCP Short episode on the Captive Intelligence website here, or on any podcast app. Just search for ‘Global Captive Podcast’.

GCP Short: Hawaii’s captive development, Alaska Airlines and innovation

Richard Cutcher
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Matt Takamine, Brown & Brown
Paul Shimomoto, Goodsill
David Beyer, Alaska Airlines

In this GCP Short, produced in partnership with Brown & Brown, Richard is joined by Matthew Takamine, Captive Practice Leader at Brown & Brown, David Beyer, Director of Risk Management at Alaska Airlines, and Paul Shimomoto, Partner at Hawaii law firm Goodsill.

The trio discuss the profile and recent development of Hawaii as a captive domicile, new trends such as Side A D&O going into Hawaii captives and Alaska Airlines’ own risk financing and captive strategy.

For more information on Brown & Brown’s captive practice, visit their Friend of the Podcast page here.

Appeals court affirms IRS summons for Delaware micro-captive info

Richard Cutcher
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The Delaware Department of Insurance (DDOI) has lost its latest attempt to block an Internal Revenue Service summons concerning 831(b) captives managed by Artex Risk Solutions and Tribeca Strategic Advisors, wholly owned by Artex, in the State.

The United States Court of Appeals for the Third Circuit on 21 April affirmed the District Court’s decision that the McCarran-Ferguson Act does not protect the documents requested and the threshold for constituting the ‘business of insurance’ was not met.

The IRS originally issued its summons to the DDOI on 30 October, 2017 during its investigation into Artex and Tribeca, seeking filings and communications between the Department and the captive managers.

The Department declined to cooperate with ‘Request 1’ of the summons, citing Section 6920 of the Delaware Code “which generally prohibits the Department from disclosing certain information about captive insurance companies to anyone, including the federal government, absent the companies’ consent”.

‘Request 1’ was seeking “all electronic mail between [the Department] and Artex and/or Tribeca related to the Captive Insurance Program”.

The request concerned around 200 certificates of authority granted by the DDOI to micro-captives managed by Artex and Tribeca. The IRS initially believe there to be 191 certificates, but the DDOI has represented that it had actually issued 225 certificates.

In its 21 April ruling, the Court disagreed with the Department’s argument that requested information would impact its “business of insurance”.

“For that argument to hold water, however, we must accept that affirming the District Court would lead to a change in behavior by captive insurers (or their managers) that would reduce the reliability of captive insurers,” the Court stated.

“That is a contention that cannot survive scrutiny. As an initial matter, the substantive requirements for licensure and continued permission to operate under certificates of authority issued by the Department is not altered by our affirmance of the District Court’s ruling.

“The Department has the authority to obtain documents it requires for licensure and subsequent examinations and can impose consequences on companies that 38 will not provide them.

“Simply put, the Department will be no less entitled to the information it currently receives to license captive insurance companies than it has previously been. The same is true of the Department’s entitlement to information to determine whether already-licensed captive insurance companies should be allowed to continue to operate.”

Captive Intelligence published on 21 April a Long Read with extensive reaction and analysis of the IRS’ new proposed regulations for captives making the 831(b) tax election.

Will 831(b) proposals destroy the industry or be a refreshing change?

Luke Harrison
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Will 831(b) proposals destroy the industry or be a refreshing change?
  • Opinion split on whether latest IRS intervention is a positive development, or “out to destroy the industry”
  • Service buoyed by four for four Tax Court victories over micro-captives
  • Up to 90% of captives taking 831(b) tax election could fall into new IRS definitions
  • Managers and services providers expected to review risk appetite of continuing 831(b) work

The Internal Revenue Service’s proposed regulations for 831(b) have divided opinion across America’s captive landscape, with some saying they could destroy the industry, while others have branded it a refreshing change.

Captive Intelligence reported last week the IRS had published proposals which, if implemented, would identify certain micro-captives as “listed transactions” and others “transactions of interest”.

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Guardrisk Life cell underwrites YuLife’s South African expansion

Richard Cutcher
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YuLife, an employee benefits and life insurance provider, will utilise Guardrisk’s cell captive to roll out its products in South Africa.

Guardrisk is the leading cell company specialists in South Africa with vehicles in Mauritius, Gibraltar and South Africa itself, writing corporate P&C risk, life, affinity and tailored risk solutions.

YuLife, which was founded in London in 2016, is now expanding to South Africa with its group risk protection (life, income protection, lump sum disability and funeral cover).

“We are excited to be working together with YuLife to bring cost-effective insurance solutions to customers in South Africa,” said Herman Schoeman, CEO of Guardrisk Life.

“As a company rooted in innovation, partnering with such a forward-thinking company like YuLife that shares our commitment to meeting customers’ needs makes good business sense.

“We look forward to developing our relationship with YuLife and providing our solutions to its customers while also empowering them to have a more thorough and holistic relationship with their life insurance and protection provider.”

YuLife has also recently expanded into the United States, and now covers more than 600k group policyholders across small to large businesses, with over $50bn of coverage in place.

YuLife says it has seen more than five times growth in premiums year-on-year, and in July 2022 raised a $120M Series C led by Dai-ichi Life with participation from T. Rowe Price, bringing the company’s total funding to $206M.

NRRA announces fundraising plans to combat Florida bill

Luke Harrison
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The National Risk Retention Association (NRRA) has announced three stages of fundraising to combat Florida Senate Bill 516, which if passed into law, would require an AM Best “A” rating and a minimum financial size of $100mn in capital surplus in order for an RRG to write commercial auto liability in the state.

Phase one of funding plans include the current campaign to communicate with and educate legislators as to the “inherent flaws in the bill”.

NRRA said it had already written four letters in opposition to the Bill to the involved committees, the Senate President and House Speaker.

The Association has also partnered with Paul Handerhan, president of the Federal Association for Insurance Reform (FAIR), who has joined forces with Lewie Pugh, executive vice president and legislative spokesman for the Owner-Operator Independent Drivers Association (OOIDA), and Linda Allen, a small independent Florida trucker.

“While our interest and those of the proponents are actually not inconsistent, their language will be self-defeating, while ours will not be,” Joe Deems, NRRA executive director said.

“The purpose will be to persuade an amendment to the Bill that will work.”

Deems has previously said that the Bill unlawfully seeks to regulate RRGs, and unlawfully discriminates against those that do not obtain such ratings.

He believes the Bill could impact 96% of the RRGs registered in Florida.

“If Florida can get away with violating the federal law by making any financial rating a requirement to do business in their state, it may set a precedent to make other states bolder to do the same thing,” Deems added.

“We need to stop this bill before it passes because, if it passes, suing the state will take years and will be too late to help these impacted RRGs.”

Phase two will be dependent on the amendments actually adopted and includes an ongoing campaign to develop favourable agreements with multiple state agencies who require liability insurance from RRGs, such as the Department of Highway Safety and Motor Vehicles.

Deems said the estimated cost of this will be in the range of $75,000 to $90,000.

On 10 April, the House Commerce and Senate Appropriations Committee voted unanimously to approve the Bill.

While the Bill did pass the Senate Appropriations Committee hearing on 12April, the vote was not unanimous, and it prompted greater discussion and a desire to know more about its potential wider impact.

If the Bill passes with the current language, NRRA said its third phase of the campaign would be to commence litigation to and challenge it at the federal level, with an estimated cost of $150,000.

Captive knowledge gives brokers “competitive edge”

Luke Harrison
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Captive knowledge gives brokers “competitive edge”

Educating brokers about the role and value of captives will provide more opportunities for business, according to Olga Collins, CEO of the Worldwide Broker Network (WBN), and John Harris, group business development director at Robus Group.

Collins and Harris featured on GCP #83, discussing the profile of WBN and its members and the increasing interaction they are having with captives in recent years.

With much of the captive management and consulting space dominated by the large, multinational brokers such as Aon, Marsh and WTW, there has long been a perception challenge among some smaller, independent brokers that promoting or proposing captives can lead them to ultimately lose out on the business.

WBN is the largest independent broker network in the world with more than 150 broker members in over 100 countries.

“[Our members] work with clients spanning from very large brands all the way to high-net-worth private individuals, and I agree that it’s a matter of education,” Collins said.

Collins added that a wider profile of client is becoming interested in the consulting services provided by brokers, in addition to transactional risk management.

Harris, group business development director at Robus Group which is a partner of WBN, said that generally some of the more traditional brokers can initially feel threatened by captives from an income perspective, as they feel they could lose out when a client enters a captive structure.

“But that typically is because they’re not necessarily as educated or have a full understanding of how a captive can play a part in a programme,” he said.

“When you start to help them realise that this is actually something that gives them a competitive edge, they start to look at things slightly differently.”

Harris noted that Robus spends time informing brokers on how a captive strategy can be used as a competitive advantage.

“One, to help them protect themselves against attacks on their existing book,” he added.

“Where they’ve got some significant clients and they’re not deploying captive strategies or even thinking or talking about it with their clients to enable them to stop the competition, the Marsh’s and the Aon and the big guys from attacking their business.

“But also to enable them to use captive strategies as a leverage when they’re attacking new prospective business as well.”

He noted that when brokers realise that this is actually something that gives them a competitive edge, “they start to look at things slightly differently”.

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