The role of a carrier as a partner in the captive

Authored by Marine Charbonnier, Global Programmes and Captives Regional Director for Europe, and Julien Guénot, Regional Manager, Southern Europe

The European captive insurance industry is embarking on an exciting new chapter. The recent uptick in captive activity looks set to continue as companies adapt to an evolving risk landscape, and as countries look to create local captive regimes.

As the captive industry in Europe enters this new phase, Global Captive Podcast (GCP) asked AXA XL’s Marine Charbonnier and Julien Guénot why interest in captives is so strong and how insurers are supporting this growing sector. Following are highlights from the podcast.

What is driving the surge in captive activity in Europe?

Marine and Julien cited several factors driving strong growth in captive formations and premiums. Foremost of these are traditional insurance market dynamics, which have caused significant adjustments to pricing, capacity and coverage across a number of property/casualty and specialty lines. However, growing interest in captives is also being driven by the continuing challenges associated with emerging and developing risks, as well as wider moves by corporates to increase resilience and centralise risk management, which goes hand in hand with owning a captive.

“In today’s highly uncertain and volatile world, agile risk management is more essential than ever, and captives have proven to be a flexible, capital-efficient vehicles for managing and mitigating complex and large risks,” Julien said.

New era for European captives

Interest in European captive domiciles is also being driven by a desire from some organisations to locate their captive operations closer to corporate headquarters, according to Marine.

Legislative changes in France at the start of 2023 have made the country a more attractive option for French companies looking to set up a captive or redomicile. AXA XL has been involved in many of the new captives established in France since and even just before the changes to captive legislation, and is talking with others interested in doing so, according to Marine. The initiative to revive captives in France is expected to expand the scope of eligible companies and make captives in France more accessible to medium-sized companies, she said.

“This welcome has been a huge success and an important step for captives in France. We think it has been a fantastic and outstanding achievement that could now see a whole ecosystem develop around captive activities in France,” Marine said.

Italy and Spain join the captive debate

Interest among European risk managers for local captive solutions has been growing over the past 12 months, with discussions now underway between stakeholders in Italy and Spain, explained Marine and Julien. Following the successful changes to captive legislation in France, they are actively talking to risk managers and brokers in other countries that are interested in pursuing local captive solutions in Europe.

“Europe’s historic captive domiciles, such as, Luxembourg, Ireland, and Switzerland, remain popular, but the French captive scene is inspiring other countries in terms of regulations for onshore domiciles, in addition to other domiciliation’ opportunities. This is true for Spain and Italy. AMRAE

did a great job in France, and we see that AGERS and ANRA are currently lobbying for more appropriate captive regimes in Spain and Italy,” Julien said.

There are several potential benefits for having the captive and regulatory environment in the same country as the parent company, and explicitly linking captive governance to the risk management, Marine explained. “We stand ready to work with clients and support them as they make changes to their captive strategy, including a change of domicile and their corporate governance and risk management strategies as we move into this new phase for captives and insurance,” she said.

Healthy pipeline of formations

Captive market growth in Europe is set to continue, according to Marine and Julien. Ongoing challenges facing the (re)insurance market, including heightened natural catastrophes, ransomware attacks and social inflation, are not going away anytime soon. At the same time, the changing risk landscape and increasing relevance of emerging and developing risks for clients will also support a bigger role for captives longer term.

“I would expect interest in captives to remain strong, with further captives established as more captive owners look to re-domicile, and as companies continue to add new lines and finance higher retentions in the current market,” Julien said.

“Risk management has climbed the corporate agenda in recent times, driven by both internal and external factors. Companies are looking for greater resilience and additional capacity in areas like natural catastrophes and other areas where insurance capacity may be limited,” he added.

Solutions for emerging risks

As risk management maturity increases, many organisations are exploring new ways to transfer and manage emerging and developing exposures using their captives. Captives are also increasingly involved in more complex areas of risk transfer, such as sophisticated global programs, noted Marine.

“Captives were typically used by clients to underwrite high-frequency, low-severity risks, but more recently many have been using their captives to underwrite less traditional lines of coverage such as cyber,” she said. AXA XL has worked with a number of clients to place new and emerging risks into their captives, including environmental impairment liability, employee benefits, as well as more niche risks, such as construction and product recall.

“A benefit to clients in self-insuring a portion of their risks in a captive is that it demonstrates to the insurance market that the two parties’ interests are aligned. It shows that the client is committed to managing the risk and reducing their exposure. This makes the client a much more appealing prospect to the insurance market and can result in them receiving beneficial treatment with regards to rates and terms and conditions,” said Julien.

While not new, there has also been an uptick in interest from more sophisticated captives in non-traditional insurance solutions, such as parametric solutions, according to Julien.

“Traditional insurance remains an essential asset for an effective and sustainable risk management strategy for companies, regardless of their size. Nevertheless, there is no doubt that captives and Alternative Risk Transfer solutions are flexible and effective alternatives, which are likely to become increasingly relevant for many of our clients. I am convinced that these solutions are complementary,” he says.

Transparency and dialogue

The trend for increased risk retention, and the evolving risk landscape, changes the conversation between insurers, brokers and captives, said Marine. Growth in captives, along with challenges like climate change, requires long-term partnerships and will drive demand for more sophisticated risk management advice and services, she said.

“Global Programs and Captives fronting management are at the heart of our strategy, enabling clients to control their global risk management and insurance cost centrally. With each phase of the market, captive utilisation has increased, expanding into new lines like cyber, and down into the mid-corporate sector which fits in perfectly with our development strategy,” said Marine.

For new and existing captives, transparency and communication are key, according to Marine. “Those are critical to the overall success. Our goal is to ensure that captives have the right people in front of them to answer their questions, and they have access to the information and data they need, when they need it… Captive insurance is a complex business but, by working together, it is possible to overcome problems and ensure the captive fulfils its ambitions,” she said.