INTRODUCTION
Against a backdrop of an uncertain inflationary market, marked by the emergence of new risks, alternative solutions to traditional insurers are gaining traction. These include captives: self-insurance vehicles created by businesses to cover their own risks without resorting to an insurer or reinsurer – a solution that is today favoured by a growing number of companies across all industries.
This trend can be seen as much in captives’ usual domiciles – Luxembourg and Ireland being at the top of the list – as in the major European economies seeking to boost their attractiveness for the development of their industry leaders’ captives.
In 2023, France adopted a new tax regime in line with Luxembourg’s, leading to the creation of a dozen or so captives in that year. Italy and the United Kingdom are assessing similar routes. At the European level, the Solvency II revision plan announced in May 2024 proposed easing the regulatory rules applicable to captives.
The context is therefore favourable to self-insurance. But under what conditions do captives become viable alternatives to the traditional insurance market?
1. CAPTIVES, A MATURE ALTERNATIVE TO THE TRADITIONAL INSURANCE OFFER
1.a – Insurance, reinsurance: how does a captive work?
Captives rely on the principle of self-insurance, making it possible to take control of risk management and create tailored coverage. We can distinguish between:
- the insurance captive, the purpose of which is to insure all or part of the risks incurred by a company internally. Such captives operate like ‘traditional’ insurers, issuing policies, receiving premiums and paying compensation for incidents directly;
- the reinsurance captive, which only bears the financial component of the risk.
The business is covered by a traditional insurer, which issues and manages the policy, and then transfers all or part of the financial risk to the reinsurance captive.
Functional chart of insurance and reinsurance captives
1.b – What are the advantages to creating a captive?
A company can benefit from creating its own insurance vehicle when:
- the company forecasts being able to reduce its cost of risk by internalising it via an in-depth risk management policy (assessment and prevention);
- the company had a favourable loss ratio and wishes to reinvest the surplus premiums from one year to another (reduction of deductibles, provisioning in anticipation of claims);
- the market offer does not meet its needs as:
- the risks are out of the underwriting appetite of traditional insurers, resulting in excessively high rates or inadequate cover;
- the risks are relatively new, with little or no cover by the market (cyber, environmental, brand image).
Depending on the location, a captive might also have tax advantages.
1.c – What are the prerequisites to create a captive?
To obtain licensing from the regulator, the captive project must prove that it has:
- implemented appropriate governance, composed of four key functions in insurance: internal audit, risk management, actuarial services and compliance – which may be combined and outsourced under certain conditions;
- solvency capital, with the minimum amounts set at €2.7m for insurance captives and €1.3m for reinsurance;
- complied with accounting and regulatory requirements (e.g. in terms of solvency).
2 – WHAT IS THE CURRENT STATE OF THE EUROPEAN CAPTIVES LANDSCAPE?
2.a – Captives vary greatly in size and are currently concentrated in Luxembourg and Ireland
European captives had an average gross premium volume of €11.2m in 2022. Their sizes vary significantly: the smallest collect premiums in the hundreds of thousands; the largest, in the hundreds of millions. Captives are therefore appropriate vehicles for all company sizes.
Captives by volume of premiums collected in 2022 (€m)
Source: SCOR report on insurance and reinsurance captives in the EEA, Nov. 2023
In 2022, Luxembourg and Ireland accounted for 80% of European captives, and 67% of the gross premiums collected. Luxembourg attracts French companies, which have registered 76% of their captives there (as well as 100% of Belgian captives and 78% of Spanish captives).
Breakdown of captives by European country in 2022 (%)
This could change as a result of developments in the tax framework in France and ongoing projects in Italy and the UK.
2b – All sectors of the economy use captives, mainly for non-life risks
Captives are present in all sectors of economic activity, with a higher volume of premiums among players in ‘large’ industrial risks (automotive, chemicals, energy, infrastructure).
Breakdown of captives’ gross premiums by sector of activity in 2022 (€m)
Captives mainly underwrite property damage and liability insurance.
Gross premiums collected by captives, by type of risk, in 2022 (%)
Reinsurance constitutes most of the captives’ business and accounted for two-thirds of premiums in 2022.
Breakdown of captive gross insurance and reinsurance premiums in 2022 (€m)
2.c – Captives in France: a new tax framework and renewed attractiveness
In 2024, there are around 200 captives owned by French corporate groups, and 80% of CAC40 companies have created one. However, only 25 are registered in France and licensed by the ACPR – including eight created since the 2023 reform and five awaiting licensing:
This recent upturn in attractiveness is due to changes in the French tax framework in 2023. Tailored to match the Luxembourg system, it allows captive reinsurers to set aside a tax-free ‘resilience provision’.
Reinsurance captives based in France may now capitalise profits made in a previous financial year to cover risks arising in a subsequent financial year.1 This means that the risk is spread over time. The measure also allows the provision to be pooled across different types of risk.
The expected impact: repatriating business and establishing new reinsurance captives
The reinsurance captive collects premiums for each insurance period:
- At the end of the financial year, up to 90% of underwriting profits (i.e. premiums less cost of claims) can be allocated to the resilience provision – an advantageous calculation when claims are low.
- The total is limited to 10 times the average amount of the minimum capital requirement over the last three years (i.e. the captive’s capitalisation, a linear function of the balance between premiums and the volume of underwritten risks).
Sources: PWC, SII
2.d – The emergence of new solutions for pooling risks between companies
In some business areas, companies struggle to find insurers willing to underwrite their risk (for example, in the timber industry and waste processing sector). Captives make it possible to create capacity where it is lacking: several companies can join together to pool their risk and create a group captive or ‘pooled captive’.
One example is the Miris captive dedicated to cyber risk, which brings together 12 European manufacturers (including Airbus, Veolia and BASF) and is based in Belgium.
3. HOW TO CHOOSE BETWEEN AN INSURANCE OR A REINSURANCE CAPTIVE?
3.a – The main differences between insurance and reinsurance captives
The trade-off between insurance and reinsurance captives is often between cost, ease of implementation and management on the one hand, and the need for significant product flexibility on the other.
In short, a reinsurance captive offers a lighter structure but does not address the problems of covering business risk in the same depth as an insurance captive:
Value positioning of insurance and reinsurance captives
3.b – Carry out a full study of the risks and costs associated with creating a captive
The creation of a captive must be accompanied by an initial strategic study, which examines the following:
- The long-term strategy in risk management:
- Evaluate the risks eligible for transfer to the captive (i.e. risks that are sufficiently secure to be carried
independently) by analysing the claims history - Define the premium retention strategy – and any additional protection via reinsurance
- Evaluate the risks eligible for transfer to the captive (i.e. risks that are sufficiently secure to be carried
- The justification of pricing within the captive, based on actuarial valuations to determine the premium level
- The costs of implementing the captive (teams, IT tools, compliance, etc.)
- Possible legal structuring, as well as a review of tax frameworks to identify the most appropriate
geographical location
CONCLUSION: IS 2024 THE YEAR MY COMPANY WILL CREATE ITS CAPTIVE?
Recent changes in the French tax and regulatory framework offer a new perspective for French companies looking for alternatives to traditional insurers.
Captives are emerging as solutions for controlling costs and cover, against a backdrop of rising premiums and the emergence of new risks.
The decision to set up a captive should be accompanied by in-depth strategic thinking to assess the company’s need for risk management, its capacity to develop this function and its tolerance of initial costs and capital requirements.
According to the Association pour le Management des Risques et des Assurances de l’Entreprise (AMRAE), in 2024, no fewer than fifty companies are studying the possibility of creating a captive insurance company. This movement could well represent a quiet development in the way companies manage their risks, paving the way for more proactive management adapted to contemporary challenges.
Alix Dupuy – Director, Accuracy / Germain Gramaize – Senior Associate, Accuracy
Accuracy Talks Straight #11 – Industry insight