Tag Archives : BEPS

FERMA publishes guidelines for BEPS on captive (re)insurance arrangements

On 20 June, FERMA has released proposed guidelines for captive (re)insurance arrangements in order to ensure a consistent implementation of the OECD recommendations on Base Erosion and Profit Shifting (BEPS).

Click above to read the document

 

The guidelines are meant to support national administrations when transposing BEPS actions into their national laws. They cover three areas which raised certain questions of interpretation by the OECD members during the implementation stage of the BEPS actions published in 2015: commercial rationale, substance and governance, and transfer pricing – premium setting process.

Jo Willaert, President of FERMA

FERMA’s aim in publishing this information report is to allow OECD members to assess, in a consistent manner, the compliance of captive (re)insurance arrangements with the BEPS recommendations. The report draws on contributions from all its 22 member associations. It explains the concept of captive (re)insurance companies, and for the first time, presents compiled data on premiums, profitability and taxation levels from a sample of 462 captives owned by European resident multinational companies.

The President of FERMA Jo Willaert says, The objective of such guidelines is mainly to avoid creating a patchwork of diverging national legislations inspired by BEPS. Captives serve an important Enterprise Risk Management role with true business purposes for European businesses and other organisations. Although captives are only a very small portion of BEPS, FERMA believes that national authorities should be guided in how to assess captive arrangements according to BEPS recommendations.

Carl Leeman - IFRIMA President

Carl Leeman, FERMA Board member and leader of the captive project group

 “Our document demonstrates that the main financial ratios of the captive insurance industry are in line with the traditional insurance market,” Carl Leeman, leader of the captive project group and a FERMA Board member, stresses. “The paper, enriched and approved by our 22 national associations, represents a strong consensus within the European risk management community on how captives are supporting the operations of their parent organisations.

This report is the first of its type. Although its data comes from European companies, it has global application because the BEPS recommendations are being adopted by many jurisdictions around the world. FERMA, therefore, presented the report to the International Federation of Insurance and Risk Management Associations (IFRIMA).

FERMA also discussed the paper in early June with the tax department of the OECD in the context of the upcoming Public Discussion Draft on Financial Transactions and Transfer Pricing expected this summer.

Press contacts

Typhaine Beaupérin, FERMA CEO: typhaine.beauperin@ferma.eu, tel: +32 (2) 761 94 31

Lee Coppack, press contact: lee@coppack.co.uk, tel: +44 208 318 0330/ +44 7843 089904


Expert view: the future of captives

FERMA board member Dirk Wegener answers some questions about captives.

FERMA: When companies are deciding to set up or maintain a captive, how important are:
Coverage that isn’t generally available on the commercial market?
Higher limits than available at an acceptable price from the commercial insurance market?
Better pricing on frequency risks (avoiding euro for euro trading with insurers)?
Better loss information?
Ability to plan better for severity losses?

Dirk: In principle, all of the above can motivate a company to set up a captive and the ultimate goal is to optimise the total costs of insurable risks. However, such a decision has always to be taken in light of the individual risk appetite of the company for self-insurance and the regulatory framework of the captive territory. Moreover, the captive has to operate on a sound business case, including risk-based underwriting, proper claims handling, and solid risk, capital and asset management procedures, because it needs to be run on an “arm’s-length” basis.
More from Dirk on captives [insert url]

FERMA: What factors govern the choice of domicile for a captive?

Dirk: It is fair to say that the predominant consideration is the territorial scope of a captive domicile, meaning the type and quantity of risks of the company and in what territories can be insured by the captive. Then, (prospective) captive owners are certainly interested in a supportive environment of their endeavour, which includes responsive and experienced regulators, a reasonable regulatory framework and the possibilities of outsourcing non-core functions.

FERMA: Do European companies typically look for an onshore domicile like Dublin or Luxembourg?

Dirk: Yes, this is generally the case. The EU Freedom of Service principles are instrumental in allowing a parent company to cover a significant volume of risks through an EU-domiciled captive, and some territories have demonstrated more interest than others in providing this attractive environment to captives. Moreover, the EU Solvency II regulatory regime is an advanced risk-based framework to grant a level plain field across the EU regards regulation, which thereby narrows even further the competition of EU captive domiciles on service capabilities.

FERMA: To what extent does it depend on the class(es) of business you want to use the captive for? Or the location of the risks?

Dirk: In principle, all typical captive domiciles allow insurance of all relevant classes of insurance contracts, but there might be some niche product which can only be insured in specialised domiciles or by setting up a structure for the purpose, such as protected cell captives. The location of the risks is a more distinct denominator. Some insurance classes can only be insured by domestic (captive) insurers, for example, such as insurance-based employee benefit schemes. In such cases, non-domestic captives alternatively often act as a reinsurer of a fronting insurer which meets the regulatory requirements.

FERMA: How does a captive support the ERM of a multi-national?

Dirk: Not only is the captive an established tool to optimise the total costs of insurable risks, it also provides transparency on global loss distributions by risk types/exposures and the efficiency and effectiveness of internal loss prevention measures. These insights, gathered from an internal data base via a process which is consistent across all risk types/exposures, makes possible a solid ERM process for existing sites and processes. It also supports investment decisions on future locations.

FERMA: To what extent do you think BEPS will increase costs for captive owners? Is this increase likely to make some captives unattractive for their owners?

Dirk: Firstly, owners of EU-domiciled captives are very disappointed that their captives are exempt from the regular procedures applicable to all other insurance companies. Throughout the entire process of the implementation of the Solvency II regime, we were told to accept being treated like any other insurance company, as we were not any different. Now, we are told we deserve a “special treatment”. This inconsistency is neither fair nor helpful to support the captive concept as effective risk mitigation tool.
And yes, proving to be compliant with the BEPS requirements will absolutely increase costs for captive owners. My hope is that the already complex Solvency II data analytics and reporting will be instrumental to prove BEPS compliance at moderate additional cost for EU-domiciled captives and, therefore, will be not prohibitive to continue the captive as such.

Read the FERMA position paper on captive insurance companies.


FERMA speaks out to change misperceptions of captive insurance

FERMA has launched a campaign to change misperceptions of captive insurance by tax authorities and other public bodies.

Click here to read the position

Click here to read the position

As a starting point, FERMA has today published a position paper on captive insurance companies, which it will submit to the OECD so that the views of European risk managers are considered when the OECD discusses the implementation of its Base Erosion and Profit Shifting (BEPS) measures with member governments.

FERMA will urge its 22 member associations across Europe to use the position paper to approach their national tax authorities, who will be responsible for deciding how to implement the BEPS measures, to explain the real risk management value of captives.

In light of the latest corporate transparency and anti-tax avoidance measure at European Union level, FERMA will also reach out to the Commission and Parliament to increase their understanding of the role of captives in the European economy. This follows the adoption in July of the Anti-Tax-Avoidance (ATA) Directive by the Council of the EU.

Jo-WillaertJo Willaert, the President of FERMA, said: “Captives serve an important enterprise risk management role for European business and other organisations. We believe it is important that EU tax authorities understand better how European captives operate to preserve these risk financing capacities. This is not about tax, but a fear that the administrative costs of owning a captive will become uneconomic.

FERMA will also raise the issues at the European Insurance and Occupational Pensions Authority (EIOPA) stakeholder group through its representative Marie-Gemma Dequae.

Key points in the paper include:

• Captive insurance enables European businesses to increase their capacity to take risk;
• The parent company gets a tailor-made risk coverage and pricing, and it can target risk reduction more effectively thanks to better loss information;
• Captive insurance contracts are genuine risk transfer transactions with pricing based on the same approaches as commercial insurers;
• European captives are regulated as other insurance entities under Solvency II;
• Many aspects of captive operations, such as the payment of insurance premium tax in source countries, demonstrate their genuine, non-tax functions.

Said Jo Willaert: “We find it ironic that Solvency II was designed to include as much as possible captives as normal regulated insurance companies, despite requests from the risk management community for more proportional regulation, and now BEPS and Commission initiatives are differentiating captives from the rest of insurance companies.

BEPS and EU anti-tax avoidance and financial transparency initiatives will be the subject of a risk managers only discussion at the FERMA Seminar in Malta on 3 and 4 October. There will also be a presentation on captive insurance and cells in Malta. For more information, see http://archives.ferma.eu/ferma-seminar-2016/


Stating the Value of Captives

Captive insurance companies, especially in offshore domiciles, are under scrutiny from international tax authorities. As the financial or tax aspects of captives are increasingly likely to be challenged, risk managers will need to be able to demonstrate the added value of owning a captive to their senior management.

Since the publication of the OECD recommendations on Base Erosion and Profit Shifting (BEPS) in October 2015, more than 100 countries and jurisdictions have been collaborating to implement the 15 BEPS actions. The guiding principle of the BEPS initiative is to ensure “that profits are taxed where economic activities generating the profits are performed and where value is created”.

For risk managers, captive insurance is not a tax issue but an efficient risk management tool, especially for large corporations,” says FERMA President Jo Willaert.

Focus on captives is also coming from new European Union initiatives. In January 2016, the European Commission released an Anti-Tax Avoidance Package, now being discussed by the Council. A Public Tax Transparency proposal followed on 12 April 2016, extending country-by-county reporting to all large corporations operating in the EU.

Figures in context

Country-by-country financial and tax transparency are raising concerns for the captive industry. If made public, country-by-country financial and tax disclosure would give access to a large amount of highly technical information. A meaningful reading and interpretation of this information require a detailed understanding of the value chain in a group; many factors contribute to the creation of value and income in a multinational.

Tax authorities are competent to perform this analysis because of their expertise and training, but the same does not necessarily apply to members of the public. Risks of misunderstanding and misinterpretation, therefore, will be significant, forcing organisations to defend and justify their financial structures not only to tax authorities, but to less informed third parties.

With nearly 7,000 captives worldwide, the risk management community is well aware of the reasons and benefits of captive insurance, which is used by non-profits and public organisations as well as corporations,” says Jo Willaert. “These are light structures which perform a genuine (re)insurance activity. They help us to maintain affordable and wide risk coverage, access to reinsurance markets and greater risk insight.