Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups, but they often also insure risks of the group’s customers as well. Using a captive insurer is a risk management technique, by which a business forms its own insurance company subsidiary to finance its retained losses in a formal structure.
A captive can present commercial, economic and fiscal advantages to their owners resulting from the reduction in risk management costs. This will enable a business to provide a cover more suited to their needs than policies available on the traditional insurance market or alternatively not available on the market whatsoever – essentially bespoke Risk Management. Couple with this the ability to build up and set reserves assists in risk transfer management.
The Luxembourg financial centre provides the ideal legal framework and administrative infrastructure for captive reinsurance solutions. With over 240 licensed reinsurance undertakings, most of which are captive companies, Luxembourg has become the largest domicile for reinsurance captives in the European Union and one of the largest in the world.
In this section, an expert shares his opinion on the establishment and management of this type of company.
Captive: a risk financing tool
“The Luxembourg reinsurance captive market has been growing since 1984.
On the 1st January of 2016, the 1991 law was repealed and replaced by the insurance sector law of the 7th December 2015, in order to transfer the provisions of the European Directive 2009/138/EC on Solvency II into national law, while maintaining the obligation for reinsurance companies to set up a Provision for Claims Fluctuation (PFS).
The Grand-Duchy of Luxembourg, as a member state of the European Union, offers to the reinsurance companies established on its territory the benefit of the freedom to provide services across the EU. This law has also introduced the supervision of the reinsurance sector by the Commissariat aux Assurances (CAA).
A reinsurer can apply for a licence to operate worldwide as a reinsurer in the non-life and life insurance sectors. In addition to its location and anchorage within the EU, the Grand Duchy of Luxembourg offers significant benefits that have contributed to its success as a location for captive insurers and reinsurers over the past thirty years.
This new regulation allows captives to be managed by a Captive Administrator to which all the tasks involved in the management of the company are delegated to, such as administration, accounting, actuarial, legal, legal and technical reinsurance.
The legislative ecosystem offered by Luxembourg makes it possible to think about how to manage and assess risks in an industrial company, banking group, etc.
Why to consider a captive?
We are experiencing difficult times in the International Insurance Market. Renewals of Corporate Programmes are proving to be very complicated and large companies are also suffering notable increases in the cost of their renewal premiums, not to mention restrictions on coverages. The years of the soft market are now history and, at Risk and Reinsurance Solutions (2RS), we believe that it is time to plan a new strategy for the future that will allow insurance managers to plan and adjust costs. It seems this will be a tough adjustment for the entire large risks market over the next few years.
As you know, Captive Companies are playing a very important role in terms of compensating and adding value for their owners, especially in these times of indiscriminate increases in the cost of premiums with restrictions on coverage. In this sense, we offer our services to jointly study the viability of an alternative project to traditional insurance programmes. This will lead to a reduction in costs for a group of companies and at the same time it will improve the position in the definition of insurance coverage.
In addition, the creation of a captive provides the Risk Manager of a group with an enormous amount of added value, such as the centralisation of the Group’s integral risk and insurance management, total transparency in the costs of all intermediaries and great autonomy in the design of coverage and wordings. Additionally, the Group will be less dependent on the fluctuations of the insurance markets and will have direct access to the international reinsurance market which, in many cases, can be cheaper than the direct insurance market.
In short, a captive is the risk financing tool that any business group would have to develop itself, in order not to be subjected to the pressures that are inherent in insurance operations.”
Authors
Georges Michelena
Partner at Risk & Reinsurance Solutions SA
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