11 June 2022ArticleAnalysis

FERMA fights for European captives

The Federation of European Risk Management Associations (FERMA) has been lobbying the European Commission over possible changes to the Solvency II regime, FERMA president Dirk Wegener told Captive International.Wegener said the Solvency II regime as a whole is still a concern, because it means that European captives are heavily regulated. As a result, FERMA hopes that the ongoing review of Solvency II will bring some positive, or more positive than negative, adjustments for captives.“Solvency II reform is one of FERMA’s major portfolios when it comes to lobbying work at the EU level,” said Wegener. “We continue to advocate strongly for proportionality in the regulation of small insurance enterprises, which include captives.”FERMA has argued that captives should be automatically considered as low-risk undertakings under the revision of Solvency II, and this should make it easier to manage captives and help to optimise costs.The administration and other costs of setting up a captive and running it are currently so high, according to Wegener, that it can be a reasonable investment only for very large corporates. FERMA does not think that this risk management tool should be effectively limited to a very small number of global corporates which can afford to have one.However, Wegener thinks this will not change the perception of captives as a whole. Instead, he thinks it will help if the adjustments are positive in the sense that the principle of proportionality is applied to a higher degree than currently.“It may change the perception of captives in the community of risk and insurance managers in terms of the potential value of the captive to the entire risk and insurance management of the parent company versus the cost of setting up the captive,” he added.According to Wegener, from FERMA’s point of view captive insurance companies are risk management instruments, so the particular angle that FERMA takes is how captives fit into the risk management philosophy or risk management structures or measures within the various companies.Wegener commented that FERMA is an organisation of European risk management associations, which means that individual risk managers are members of its members. To complicate matters, he added, captives are predominantly used by larger, multinational corporates, so not all risk managers deal with captives.

“The differentiation between captives and smaller conventional companies isn’t always clear.”

Dirk Wegener, FERMA

Size of the market
Looking at the size of the captive insurance market in Europe, Wegener says that this is a difficult point to quantify as there are many sources and studies on the subject. On the other hand, it’s difficult to precisely list all captives by their numbers.“Captives are properly licensed insurance or reinsurance companies, so they don’t have an identifiable ‘captive’ sticker,” he explained.“That means the differentiation between captives and smaller conventional companies isn’t always clear. We also have instruments such as protected cell captives that are used like a captive by some corporates, but might not qualify as a typical captive.“However, we do have a pretty good estimate of what the numbers are—we think there probably around 800 captives in Europe, out of 6,000 or 7,000 worldwide.”According to FERMA, the European picture is something of a mixed one. Some domiciles are considered as captive-friendly, such as Ireland, Luxembourg and Malta. However, following the UK’s departure from the EU other captive-friendly domiciles are no longer in the EU, such as the Isle of Man and Gibraltar. Other countries do not yet have the reputation of being a captive domicile, such as France or Germany.As a result, Wegener agrees, there is a lot of work ahead for the captive insurance industry in educating the market about the nature of captives themselves.“It is fair to say that there is a perception of captives being suspicious, of looking like a tax evasion instrument, which is of course not true,” Wegener explained.“We try hard to fight against this perception. We want to make sure that decision-makers of all kinds look at captives as a risk management tool and not as a pure financial instrument to reach pure financial results.”According to Wegener better information about captives in the media goes hand-in-hand with the concern of risk managers regarding the offering of the private insurance sector in the current hard insurance market environment. He said that issues involving underwriting policies, writing premiums, and capacity shortages, etc, are worrying risk managers, making it difficult to transfer risks outside.Even though they are not a transfer of risk outside the company, captives are nonetheless a method to organise risk transfer within the portfolio of a multinational group of companies. Doing so can incentivise proper risk management by the individual managers within the group.As a result, FERMA feels that a captive can play a big role to improve risk management and loss prevention in very large corporate entities, which is helpful in itself but also has an impact on the resilience of a society against shocks.