Ask the Expert: Zurich on Captive Insurance

What does the future hold for the captive industry?

We still see potential for growth in the captive industry. The reasons are interests relating to the essence of alternative risk financing: getting more capacity to finance risk, extending the coverage even beyond the exclusions, finding coverage for less attractive risks and quicker return on investment in risk prevention.

Another contributing factor is recent legislative changes resulting from Solvency II, which push captive owners to think more about risk diversification in their alternative risk financing tool, like extending the lines of business to life, trade credit, political risk, cyber, etc. While some players now have left the captive area, newcomers are replacing them. Also, we see a trend of developing countries (or recently developed countries) starting to get interested in the topic.

What is the likely impact of Solvency II on the European captive market?

At this stage, it is a bit too early to have a clear answer to this question. There are groups that are definitively adverse to the implementation of Solvency II and that are in various states of implementing exit strategies. Others are, on the contrary, already prepared for Solvency II and see this as a recognition for their captive and a way forward to further make use of their tool. At least one thing seems clear: owners of the smallest captives and the ones having invested in this tool with a pure tax driven approach have long since left the captive market.

What is the prospect of growth for the captive market in fast emerging parts of the world notably Africa and Asia?

At this stage, we see little development of demand from Africa. However, it is a different story with Asia. We see potential for growth of the captive industry in Asia, but do not expect too much impact for existing captive locations: Asian countries are also thinking to develop their legislation to attract captive owners.

How should captives be used to optimise the use of global programmes?

Captives are a great tool to play a role especially in the first layer of an international programme: they can mutualise risk and, from a commercial point of view, increase the ‘deductible’ for the insurance company while allowing smaller customer subsidiaries to still be insured with a sufficient insurance structure. It may also allow, over time, a reduction in the price fluctuations connected to the claims activity and the markets.

Furthermore, captives can play a pivotal role in the risk engineering part and risk prevention as they may serve as well to finance a portion of this expense (since captives are benefiting from this investment).

Over the last few years, we have seen some developments on an international level to define stricter compliance rules in the financial sector. With the help of an experienced insurance company like Zurich, captive owners may benefit from the various tools and the years of experience developed in order to face the strict international and local compliance and governance challenges.

Zurich, for instance, was a thought leader when developing its Multinational Insurance Application (MIA) which allows clients to define a worldwide international programme with compliance in mind. With the same pioneering spirit, Zurich developed already some years ago a consistent transfer pricing approach which we expect should help mitigate customers’ captive related  requirements which may result from BEPS and related developments.

Are there any tax or regulatory issues that potentially threaten the value of captives?

We see various threats that could induce changes. The implementation of Solvency II and the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) will challenge some organisations and require them to handle the captive more carefully and diligently. This is also impacting the insurance industry as a whole and requires fronting insurers to provide more sophisticated answers than ever before. This means that the insurance industry must adapt to this change which may further limit the number of players being able to answer these needs sufficiently. For the future, we expect the next challenging topic to come from the accounting side with the evolution of the International Accounting Standards (IAS) norm.