Captive growth in France set to take off if government backs new rules

As they feel the bite of the hard insurance market, French companies have moved decisively towards setting up captives to transfer their risks in a more cost-effective manner.

A survey by AMRAE, France’s risk management association, found out that at least 50 projects to implement new captives are under development today among its members, split between 30 reinsurance captives and 20 insurance ones.

Although the vast majority of the projects are being carried out by large corporations, at least 15 medium-sized companies are working to set up their own captives as well. Most intriguingly, perhaps, two companies defined as SMEs are also taking this significant step towards self-insurance.

In total, AMRAE surveyed 116 of its members, of which 54 answered that their companies already have a captive in place.

Manufacturing companies own almost 30% of the existing captives found by the survey, constituting the biggest share, followed by services groups (15%), construction companies (10%) and retailers (9%).

However, it is estimated that only about half a dozen captives are based in France, even though the country has legislation that allows the establishment of such self-insurance vehicles.

The number of companies that own captives is set to increase and could even accelerate before the end of the year, however, if a major legislative step is taken by the French government to make France a more attractive jurisdiction for captives.

Of the 50 companies working on their projects today, 38 said they are waiting for news from the government on hoped-for legislative changes that AMRAE has pushed for in recent times, before they move forward with their plans.

The legislative changes in question refer to an announcement by the French Treasury made earlier this year, that it supports the development of self-insurance and other alternative risk financing tools in the country as French businesses struggled to cope with the hardening insurance market and impact of Covid-19.

The announcement gave a boost to discussions promoted by a working group, of which AMRAE is a member, that is analysing measures that could make it more viable for companies to choose France as a captive jurisdiction.

During a meeting with the press on Wednesday, the president of AMRAE, Oliver Wild, said that a proposal has already been drafted by the working group and is about to be presented to the French parliament.

The hope is that it will be tabled along with the 2022 Budget, in September, and that the new rules will kick off by January. If this happens, companies could finalise their arrangements in time to add their new captives to negotiations with underwriters for the next January renewals.

“The most important finding of our survey is that the majority of the risk managers who have projects to set up a captive are waiting for a decision from the government,” Mr Wild said. “It is a decision that AMRAE also awaits impatiently and will enable the strengthening of resilience and robustness of the economy.”

He said the new framework about to be announced, and which has been negotiated by AMRAE with the Treasury for several months, should offer conditions for the creation of France-based captives that are at least as competitive as those available in other jurisdictions such as Luxembourg, Malta or Ireland.

Ideally, in order to attract a larger number of interested companies, the conditions should be even more favourable, he stressed.

“We cannot miss this opportunity and there is not much time left,” Mr Wild added. “It is not possible to create a captive overnight and it is a critical risk management tool. In preparation for the next renewals, many (companies) will want to create a captive to shore up their risk management structures.”

The AMRAE president also said the proposal includes another measure proposed by the association, to create a fund that will build reserves with the goal of helping SMEs to have a financial buttress against future shocks.

“All the technical discussions are done and the feedback we have had from the government is that the proposal is ready. Now, it is time to wait for a political announcement,” remarked Mr Wild, who is also group chief risk, insurance and internal control coordination officer at Veolia.

The main priority concerning French captives, in AMRAE’s view, is to change the law so that companies can build up provisions without the need to attach them to a specific risk. They should also be able to mutualise risks over a longer period of years.

Current French tax legislation makes it unviable today for non-insurance companies to do this for more than one year.

“Today, the capacity to build reserves for future shocks in Paris is almost none, while it exists in places like Luxembourg and Bermuda,” said Brigitte Bouquot, a vice-president of AMRAE.

She noted that the number of captives created by French companies has increased fivefold since 2017, which shows that risk managers are aware of the usefulness of the tool.

Ms Bouquot, who is also vice-president of insurance and risk management at aerospace group Thales, described the planned change of rules as a historic moment for the market in the country.

She stressed the importance of the collective industry effort to convince members of parliament that the new rules will guarantee that captives will be used to strengthen risk management strategies, and not to pursue tax optimisation or other spurious goals.

“It is necessary to make a collective pedagogic effort,” Ms Bouquot said. “In general, a member of parliament’s insurance culture is close to zero, and it is negative when it comes to insurance captives.”

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