8 March 2024Analysis

Building on the promise of captives

Guenter Droese, executive director of the European Captive Insurance and Reinsurance Owners’ Association, talks to Captive International about the difficulties of engaging with regulators and others over the past two decades—and what lies ahead.

What kind of challenges has ECIROA faced since it was founded in 2008?

As a group of stakeholders we have contributed to the changes in the market before the introduction of Solvency II. It was rather easy to found the European Captive Insurance and Reinsurance Owners’ Association (ECIROA) and to represent the expertise of the members.

But it has been a heavy burden to engage with regulators, politicians and others who have no expertise but want to present regulatory solutions to the industry. It may well be correct to say that even today, the breadth and depth of insurance knowledge in public authorities does not go beyond the basics—
largely because of a specialisation of individual sub-tasks and a lack of awareness of the complexity of individual companies.

If more details are prescribed, this is based on a pronounced mistrust of the companies. This also applies to other directives, laws and guidelines.

Unfortunately, the self-appointed consultants always side with those who make the demands and then offer their advice to the troubled company, which rarely achieves the hoped-for relief associated with the assignment.

Simplification based on professional training and years of successful performance counts for less than stupid and unnecessary complications. The objectives of a policy must be achieved in a way that benefits or pleases users.

"The banking sector has a great opportunity to learn from the insurance sector." Guenter Droese

We have always assumed that the Principle of Proportionality (as laid down in the Lisbon Treaty) is a perfect concept to reduce the workload and costs for individuals and companies in Europe, but the application of all directives and the transposition into local laws is unfortunately a bad, sad or completely messed up experience. Instead of simplification—without losing the goal—detailed requirements in all laws and regulations are being extended with relish. This is obviously a European tragedy.

Solvency II is fully supported by ECIROA in its principles and objectives, and compared to the other part of the financial sector—the banks—we strongly believe that the banking sector has a great opportunity to learn from the insurance sector and the full capital coverage of all risks. The business risks of banks in particular are not covered by capital (with the exception of credit risks). The financial crisis of 2008 is far from over and will continue to cause partial crises over the coming decades until the underfunding of private and institutional debt is reduced to a calculable level.

How has the European captive insurance market evolved over the years?

The European captives market has developed very slowly over the last 30 years compared to that of the US. This is primarily because of a misperception of the benefits of captives on the part of insurers and companies—and because of the major negative influence of large consulting firms, auditors and tax advisors who have always expressed concerns.

The positive dynamic with the establishment of new captives and a growing willingness on the part of companies to bear risks themselves is due to capacity bottlenecks and a lower risk appetite on the part of insurers who fear for their profitability. We welcome this increased risk-awareness and the search for intelligent avant garde solutions.

How is risk management changing?

Risk management is increasingly understood to mean coping with future sudden and unexpected financial bottlenecks caused by sudden and unexpected events. This is without black swans, which are a poor excuse for a lack of risk-awareness and do not take into account contributing causes, for example.

We should look to the future and talk about challenges such as artificial intelligence (AI), the misuse of social media and the internet in general (fakes or misleading information, etc), cryptocurrencies, political and criminal influences on corporate activity. The growing market power of our companies will not be a bed of roses for customers or shareholders. Risk self-control and adequate compliance management systems will not work as expected without perfect supervision due to increased complexity—not even with the help of AI.

Avant garde solutions are necessary and available based on an unbiased, open-minded and well educated management or ownership. Captives will play a significant role in such alternative risk transfer solutions.