Companies in Europe and around the world are continuing to look for every possible advantage in order to minimise costs. For businesses spending a large amount or retaining high levels of risk financing, captive insurance could prove a lucrative option. There are a variety of factors that companies must consider when deciding whether captive insurance is needed and subsequently how it is managed.

Nick Wild, Executive Chairman of Guernsey-based JLT Insurance Management spoke to European CEO on the disciplined nature of captive insurance, the best domicile locations and how the growing industry could help reduce company expenditure, despite the
looming regulations.

What is the purpose of a captive insurance company?
Captives are a sophisticated form of self-insurance, the purpose of which is to reduce the cost of risk financing. A captive can achieve this by risk retention, transfer to the reinsurance market, pooling within an organisation and maximising the risk appetite of the group verses that of the operating companies.

Captives manage risk retention in a formalised environment, with appropriate corporate governance and management information being built into the process as a pre-requisite. They are regulated entities and this brings a discipline to self-insurance that might otherwise be missing.

How well is the concept of captive insurance understood in Europe?
Countries such as the UK and Sweden have used captives for self-insurance for over 30 years. Others such as Italy and Poland have used them very little. The reasons for this include business practice and culture as well as technical and historic matters such as state control of companies and insurance legislation. There is considerable potential in Europe for the wider use of captives.

What role, if any, does tax play in operating a captive?
There was a time when captives provided some tax benefits, mainly a deferral rather than a reduction. Today the tax benefits are minimal and are not a contributing factor in the decision making process.

Which domicile is best to locate captives for a parent organisation in the EU?
This will depend on your specific requirements. For instance, does the captive need to write insurance direct within the EU? If so the choice will be those countries within the EU that seek to attract such business – Gibraltar, Ireland, Luxembourg and Malta. If the captive can receive the risk as a reinsurance placement then domiciles outside the EU become an option, such as Guernsey and the Isle of Man.

Other factors that will drive the choice are the cost of operations, ease of travel, the regulatory environment and the expertise to be found there.

Do you think we will see an even greater growth in the use of captives within Europe?
We are seeing increased interest in captives globally. This is being triggered by two factors. The first is that we have seen a prolonged period when the insurance market has had too much capital supplied and as a result prices have remained low. The price of insurance is now starting to pick up slowly and we are experiencing an increase in enquires about captives as a precautionary measure against the rising cost of insurance. This is combined with the current recession, where companies are looking to reduce all aspects of expenditure.

So captives are currently being considered for reasons of cost containment and cost reduction. Companies in Europe have these same concerns, so I believe we will see a period of growth in captives for European companies.

Is the new European Insurance Regulation Solvency II going to impede that growth at all?
Solvency II has been designed to regulate all insurance and reinsurance businesses within the EU. Captives that wish to write insurance in the EU and are therefore established within the EU will have to deal with the substantially increased regulatory burden imposed
by Solvency II.

The European Captive Insurance and Reinsurance Owners Association is lobbying hard to achieve some form of proportionality for captives within Solvency II. The regulators in domiciles such as Malta and Ireland are also working to try and create an environment under Solvency II where captives can continue to operate efficiently.

Despite these best efforts Solvency II will be onerous for captives and will raise the bar for viability, as the cost of their operations will increase.

There are domiciles such as Guernsey and the Isle of Man, sitting outside of the EU and therefore outside of Solvency II, where European companies can establish reinsurance captives and enjoy the benefits of regulation tailored to the nature of captives.

For further information visit www.jltcaptives.com; email nick.wild@JLTGroup.com;
tel +44 1481 737 120