Wednesday, July 24, 2024

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Successful first year for French captive regime, but market eyeing further regulatory progress


  • French regulator improving understanding of regulating captives
  • Licensing timeline can stretch beyond six months after application
  • PCCs and extension of equalisation provision for employee benefits under consideration
  • A greater local captive ecosystem will reduce the need to outsource
  • Exodus of French re-domestications from Luxembourg unlikely in large numbers

France’s first year as a captive domicile has been hailed a success, but a stronger local ecosystem and continued education will be key if the jurisdiction wants to build on its early achievements.

Captive Intelligence reported in June last year that the French government had confirmed details of the equalisation provision made available to reinsurance captives, and the first two new captive entities were licensed shortly after the publication of the decree.

France currently has 16 captives domiciled in the jurisdiction, with 10 captives specifically linked to the new captive legislation.

Captive Intelligence understands two of the most recent captives formed in France are owned by Vivendi and Orange.

France’s most notable feature is its equalisation provision, which largely resembles the provision offered in Luxembourg, although not quite as generous.



Under current legislation, the French provision can reach 90% of the technical result within 10 times the minimum capital requirement (MCR).

“France implemented a framework which did not exist in the past but was copied pasted with 90% similarities with the Luxembourg provision mechanism,” Maxime Schons, managing director at Strategic Risk Solutions (SRS), told Captive Intelligence.

Aurélien Schwachtgen, director of client solutions at Aon France, said that so far, the equalisation provision has largely been a success.

“But there is some frustration because it’s limited to non-life risk, and some non-life risks are excluded,” he said.

“We are hoping to extend the equalisation reserve to all lines of business including employee benefits, and that’s what clients are requesting.”

Schons said that the interest in captives is growing from French companies of all types and sizes.

“There are new types of players, non-listed corporates, mid-sized companies, regional, family-owned businesses, that are beginning to learn the concept of captives,” he said.

“Last year, we worked on several feasibility studies for French groups and half of them have now entered the implementation stage, currently seeking approval from the regulator.”

The hope among some in Europe’s captive community is that France’s success will lead to greater efforts in other industrial nations on the continent to introduce a tailored captive regime.

Italy has already followed in France’s footsteps with the licencing of its first captive in November and its second in December.

There has also been noise around the UK introducing its own captive legislation, while Germany and Spain have been linked with further domestic captive utilisation.

Education

Brigitte Bouquot, chairman of Fédération Française des Captives d’Entreprise (FFCE), said there has been progress behind the increasing acceptance of captives in France, which she said is partly due to Covid-19, natural catastrophe events and cyber risk.

“In France, there is also a big debate as to how to insure local authorities, even if they do not hold captives, and the mindset is evolving quite quickly to better risk management,” she told Captive Intelligence.

The FFCE was launched in September and works in unison with the French risk management assocaition (Amrae), where Bouquot was previously president.

“We are all risk managers and when we discuss with the government, we are very well recognised by the business Federations,” Bouquot said.

Bouquot explained that in France businesses are mostly represented by their Federations, as the government negotiates with the Federations on the behalf of industry.

“The Federation has been a success because we have reached a political influence in the debate, but sometimes we are not invited to all the meetings,” she said.

She highlighted that in the future she wants the FFCE to expand its scope and continue to represent French captives, but also be representing a much greater amount of overall captive revenue.

“Today it’s very small, but we are pretty sure that we will be a large Federation relatively soon,” she said.

Continued education of stakeholders will be important if France is to maintain momentum regarding new captive formations.

Schons said there are currently a number of places where captive training can be accessed by important stakeholders.

“This can be organised by Amrae, the private sector or it could be done internally with the captive manager,” he said.

“In every board meeting we at SRS are organising training sessions for directors, key functions, whoever; on specific topics, and this is part of the overall education.”

Application and enhancements

There was concern when France first published its captive decree that there would be a bottleneck of applications, but the regulator has been quick to improve its understanding of regulating captives.

“The regulator had to learn what a captive is and what works, so that’s why I think the first submissions were quite long, but the regulator has progressed a lot, and although companies still have to wait, it is a bit smoother than it was at the beginning,” Schwachtgen said.

Unlike other domiciles, after the creation of the captive, the parent company must wait for the captive to be licenced by decree before it becomes an official entity.

“After the creation of the captive, which can sometimes take more time than the client wants, the French Prudential Supervision and Resolution Authority (ACPR) then gives approvals once a month, so the client has to wait for the captive to be licensed by decree before it then becomes official,” said Marine Charbonnier, head of captives and facultative underwriting for APAC & Europe at AXA XL.

“We have had some changes to the ACPR team that is dedicated to the approval of captives, so it has required more time for captives to get answers, but it is well understood that it can take more than six months to get an approval.”

Schwachtgen said the regulator will continue to enhance its captive skills and experience, and at some point, France’s regulation model will be closely aligned to Luxembourg or Dublin.

Schons said the regulator is currently analysing new legislation it could implement in the future.

“This could be a protected cell company, or it could be different insurance programmes, as well as other things,” he said.

“The regulator has said it wants to be a good partner to captives and is willing it analyse everything that comes to its desk.”

There is also belief that the forthcoming changes to the Solvency II regime will ease the legislative burden on captives within the EU, including France.

“We are taking the opportunity of the Solvency II revision to hold discussions with the French regulator and get practical simplification around captive governance,” Bouquot said.

“One of the priorities of the Fédération as of today is to analyse the governance of existing French captives and to establish what we like in this particular model, what could be done to simplify and what we want to reinforce or improve.”

Captive management

Although France has had a strong year in terms of captive growth, there is still work to be done to create a well-oiled captive ecosystem within the jurisdiction, with a lot of captive services being outsourced to other domiciles.

“The accountants of the captive, the actuarial function of the captive could be based in another domicile but if they change this and emulate the same model as Luxembourg or Dublin, the demand will be huge in terms of people able to manage a captive and be on French territory,” Schwachtgen said.

Schons said that if France wants to continue to be successful, captives will need to have more of a physical presence within France.

“Traditionally, things in France were and are managed outside of the country, like Luxembourg,” Schons said.

“However, we think it’s important for different reasons to show that the captive industry is going to expand in France every year.”

In November 2022, SRS opened an office in France, in anticipation of the country introducing specific captive legislation.

One of the biggest challenges that France faces as it looks to bring more captive expertise in-house is being able to recruit experienced talent from a limited pool.

“Local captive managers want to invest, they want to recruit people with knowledge, but it’s not easy because they have to know enough about insurance and reinsurance, and understand the accounting and regulation,” Charbonnier said.

Bouquot said that although generally there is not enough talent is France, it can depend on the specific service as she has observed that actuarial talent is quite abundant within the country.

“However, it appears sometimes that the resources of the captive managers are still located outside of France, mainly if the captive manager is part of a big firm,” she said.

Charbonnier said that in order to make sure the ecosystem works properly it is important to have discussions and relationships between key stakeholders within the jurisdiction.

“This is not only the captive manager and broker but also the insurer as they are at the heart of the ecosystem in terms of information and financial flow, governance, and regulation,” she said.

“It’s really a strong partnership we develop with captives and it’s key to have dialogue between us all.”

Re-domestication

French-owned captives have typically gravitated towards Luxembourg and Ireland, while there are also French captives in Malta, Switzerland and Guernsey.

However, there has been talk of the potential for several captives re-domesticating back to France, particularly from Luxembourg.

Schwachtgen said the next “big question” for the domicile is around re-domiciliation and whether the French captives in Luxembourg and in Ireland are likely to return home.

“We have 120 French clients that have a captive globally, and around 20 are in France,” he said. “That means around 100 could come back to France and that’s potentially the next big move.

“However, it’s a grey zone because to bring back a captive is costly, and at this stage the equalisation reserve is providing a little bit less than in Luxembourg.”

Captive Intelligence understands so far there has only been one captive re-domesticated from Luxembourg.

“It’s a complex journey because of the specificity of Luxembourg, and its equalisation reserve, but also because of specific demands from ACPR,” Charbonnier noted.

Schons said that he does not think many captives will re-domesticate because it can be a challenging task, primarily for tax and administrative reasons.

“There has been some interest and demand from French groups based in Luxembourg to see how it could work and what is the plan to do it, but there has not really been much action apart from one,” he said.