A growing trend
Captive insurance is a subject which has attracted quite a lot of attention recently. Interest in this area is increasing for a number of reasons, including as a consequence of: rising rates for reinsurance coverage; a limited supply of insurance coverage in some areas; and possible upcoming regulatory interventions.
A captive insurance company is an insurance company established by another (usually non-insurance) company (or group of companies) to provide insurance coverage exclusively for the risks of its shareholder and/or of the affiliated companies of its shareholder. Captive insurance companies are mainly used to: optimize insurance cover; reduce costs for insurance coverage; have tax deductible insurance premiums (as opposed to non-deductible contributions to the capital reserves) at the insured company; get access to the reinsurance market; get better rates at the reinsurance market; deal with restrictions such as sanctions; or find insurance cover for 'hard-to-place risks', such as cyber risks, elementary risks, or risks which are excluded in the existing insurance coverage.
In the EU, captives are defined in the Solvency II Directive and benefit of the general principle of proportionality as well as of simplifications as regards the calculation of the SCR and the MCR. The need for other simplifications, especially as regards reporting obligations, was addressed in the 2020 Solvency II Review. EIOPA issued a draft opinion on the supervision of captive (re)insurance undertakings with a focus on intra-group transactions (especially cash pooling), on the consistent application of the Prudent Person Principle and on governance-related aspects in connection with key functions and outsourcing requirements.
Captive insurance companies offer companies more flexibility to manage a hard insurance market. We expect the trend of increased captive insurance activity to continue into 2025. Further, we see a trend to ‘onshore’ captives resulting from regulatory changes, for example in France and Italy. Onshore captives can reduce costs associated with cross-border operations and compliance, and might provide better control over risk management and insurance programs. We expect other jurisdictions to follow, taking the benefits of captives managing risks that are difficult to insure through traditional means and thus provide financial stability.
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