Tag Archives : Captives

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/

Solvency II: Spotlight now turns on national regulators

Consistent implementation of Solvency II across the EU is the only guarantee that European insurance buyers will benefit from a new level playing field to optimise the protection of their organisation.

Because regulators have now a key role in the local enforcement of Solvency II, this is where our attention should be in 2016. The interpretation and local adjustment will play a fundamental part in how Solvency II will be perceived by the sector.

Since 1 January 2016, the rules set by the Solvency II Directive have been officially the new regulatory regime for the insurance industry in the European Union. The Directive has been transposed and implemented into the national laws of the 28 EU member states. From the adoption of the Directive in 2009 until the latest amendments in 2014, it is now up the national regulators to apply and enforce the new rules.

EIOPA offices in the “Westhafen Tower” - Frankfurt

EIOPA offices in the “Westhafen Tower” – Frankfurt

Solvency II also came in 2014 with a detailed text called a delegated act which specifies with further details how the national authorities will have to understand and effectively put into place the capital, governance and reporting requirements.

It remains to be seen how the local regulatory authorities will handle the additional workload. The new reporting rules and the documentation will require a lot of resources to be assessed and used properly. This is the necessary condition to turn the new regime into a really meaningful exercise and grasp the full potential of Solvency II.

The newly needed resources, however, are likely to increase the fees that most supervisors impose on insurers. With its privileged position and access to all EU local insurance supervisors, the European insurance and pensions authority, EIOPA, will have to monitor closely the impact of Solvency II in terms of the regulation costs for the whole industry.

EIOPA also announced that the principle of proportionality set forth by the Directive will be scrutinised to monitor how local regulators have translated and defined what is a captive and how the principle of proportionality should be applied to the eligible entity (Keynote speech of Gabriel Bernardino, Chairman of EIOPA, “Implementation of Solvency II: The dos and the don’ts” – International conference “Solvency II: What Can Go Wrong?”, Ljubljana, 2 September 2015).

“Solvency II Predictions” article featuring Jo Willaert, FERMA President

The article has been originally published  by Captives Review on 3 December 2015.

Captive review - solvency II predictions

Click above to read the full article


Expert Views

Günter Dröse, Chairman of the European Captive Insurance and Reinsurance Owners’ Association (ECIROA), answered some questions from FERMA about ECIROA’s initiative on the insurance supervision of global programmes. Continue reading

Solvency II: one step further towards legal certainty despite a restrictive definition of captives

The Delegated Act for the Solvency II Directive was finally published on 17 January 2015 on the EU Official Journal.
The definition and simplifications for the calculation of provisions for captives have remained constantly the same since the versions of July and October 2014; they are treated in the articles 89, 90, 103, 105 and 106 of the new Delegated Act. Eligible captives are still limited to the type of captives which do not have compulsory third party liability business and which provide cover only to undertakings belonging to the group.
Continue reading

Solvency 2 and captives – a SWERMA perspective

The Swedish risk management association SWERMA has written to the country’s financial regulator over issues relating to the implementation of the Solvency II regulations and captive companies.

The comments, prepared by me as Chairman of SWERMA, and CEO of ASSA ABLOY Insurance, and two SWERMA board members, Annika Forsgren
CEO Insurance AB Gota Lejon, and Ola Nilsson
CEO SCA Insurance AB, stated that: Continue reading

A Guide to Captives

FERMA member association Airmic has produced together with Chartis a guide to captive insurance companies. Continue reading

Green with liability

Following developments on the implementation of the European Liability Directive, Pierre Sonigo explores its implications for captives and operators in the region. Continue reading