A new dawn for captives

It is not so much that it has reinvented itself, rather just expanded its role and become a multi-purpose risk financing tool. Of course, this is what the captive has always done, from rent-a-captives and Risk Retention Groups (RRGs), to Protected Cell Companies (PCCs) and Special Purpose Vehicles (SPVs).

The mood at the recent European Captive Forum in Luxembourg was certainly much more positive than it has been for some years. It is telling since captive growth has in recent years been focused on US parented captives, and in particular, US domiciles, which appear now to be two-a-penny.

This has much to do with so-called micro captives (831b captives) which have dramatically lowered the entry point for potential captive owners, opening up the concept to small and medium-sized firms.

hide

But in Europe, things are happening. European domiciles that had set their face against cell captives such as Luxembourg and Dublin are now believed to be seriously looking at legislation. The other domiciles have been expanding their range of captive offerings including Incorporated Cell Companies (ICCs) and Securitised Cell Companies. They are looking into the ILS market, longevity risk and other newer uses of captives.

And one of the more surprising messages to come out of the European Captive Forum was that Solvency II, for all its compliance issues and the work that captives have had to put in as a result, actually appears to have strengthened the captive concept in Europe.

It was expected that Solvency II could lead to lots of captives closures and moves offshore and out of the EU. On the contrary, captive managers report that captives are choosing to move onshore in the EU, partly driven by the issues around tax, BEPS and reputational risks.

Of course, these issues around tax and the mistaken view that captives are all about tax evasion, means that there are still challenges for the captive sector to deal with. But add in the growing interest in captives in Latin America and Asia, particularly China, and to a lesser extent Africa, and the future is looking pretty good for the global captive sector.

Captives are an invaluable risk management tool regardless of the state of the insurance market. Throw in a hardening market in the future, and captives will truly show their worth.