European captive landscape shifting

The introduction of new regulations in certain countries to incentivise companies to form local captives or redomicile existing ones is starting to change the landscape of European captive domiciles, according to AM Best.

In its new Best's Market Segment Report, “Rated European Captives Continue to Demonstrate Stability in a Volatile Risk Landscape”, AM Best notes that captives have proven to be a cost-effective risk management tool by providing suitable covers, particularly for large risks such as cyber, property and business interruption.

Considering the softening market conditions, Kanika Thukral, associate director and one of the report authors, noted: “Many captives have high levels of reinsurance dependence in order to offer the large limits required by their parent companies. Given their generally favourable claims history, AM Best expects captives to negotiate better terms and conditions for their reinsurance programme during the upcoming renewal season, which in past years has often been restrictive with higher attachment points and incorporated exclusions, particularly for certain liability and natural catastrophe exposed risks.”

At the same time, the European Commission's review of Solvency II is nearing completion, AM Best pointed out. A central focus for captives in these amendments is the application of proportionality, allowing some insurers to be classified as small and non-complex undertakings.

The amendments are expected to take effect from January 2027, and while some stakeholders argue the reforms could go further in easing the regulatory burden on captives, the EC seeks to balance regulatory relief with policyholder protection.

To access a copy of this special report contact AM Best.

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