Captives thriving in Europe, AM Best finds

European captive use is thriving, according to rating agency AM Best. Its market segment report finds that premium increases from 2018 onwards have seen many captives increase retentions or limits on existing cover, and some expand into new lines of business.

“European captives have been resilient to the COVID-19 shock, generally maintaining stable ratings fundamentals during 2021,” the report adds.

“Price increases in the re/insurance market began to appear as early as 2018 in some segments. The market has continued to harden since, with commercial insurers and reinsurers commonly reporting rate-on-rate increases and a tightening of terms and conditions,” it states.

“Casualty lines, in particular, have experienced significant price increases, as insurers have responded to the impact on loss experience of social inflation stemming from increased litigation and so-called ‘nuclear’ verdicts.”

Despite the increasing use of captives, numbers have grown more slowly. According to Best, of the continent’s top three captive domiciles – Guernsey, Luxembourg and the Isle of Man –  only the second saw an increase in 2020.

“The explanation is likely a combination of the time it takes to set up new captives combined with merger and acquisition activity among corporations leading to redundant captives being closed down,” it concludes.

However, challenges remain for captives from the review of Solvency II, with the report authors concluding that many captives would not benefit automatically from proposed “proportionality measures” but may still apply them after approval from national regulators. Clarification will also bring benefits, though, it notes.

“The lack of consistency in regulatory approaches between EU national supervisors is a common complaint from captives and other insurers. The more precise rules of the proposal compared to the principle-based approach reflected in the current legislation will likely go some way to address this issue,” it says.

The report also looks at approaches to environmental, social and governance (ESG) issues. An increasing number have integrated ESG factors into their operations, the report finds, with captives’ ESG approach often closely linked to their parent organisations’.