Captive revolution made possible in France as insurers retreat from risk
Leading French risk managers who took part in this year’s Risk Frontiers Europe survey agree that the French Treasury’s recent decision to introduce captive friendly regulatory and fiscal environments in France following the Covid-19 crisis is a big step forward.
The AMRAE members do not expect there to be hundreds of captives created in France this year because there are still a number of external and internal barriers to overcome, along with the time, effort and cost involved.
But the time is right for French companies, large and small, to be looking at this viable option that could help build greater resilience, the risk managers agreed.
The commercial insurance and reinsurance market has seriously reassessed its risk appetite in recent times for covers such as cyber and now property. There is a real possibility that this is not a simple cyclical shift but rather a long-term re-set. And so the introduction of captive rules in France is more than welcome.
Fantastic news
“I think this is fantastic news,” said AMRAE president Oliver Wild. “It won’t happen overnight – perhaps ten more captives this year in France on top of the existing ten – but in year two to three I think it will be interesting. The levels of provisions allowed will be higher and so we will see new structures arrive. The dialogue with the insurance market was broken in 2019, it was fractured. We have seen the arrival of the cyber mutual MIRIS – such a structure has not been created for years. This crisis has given us risk managers an opportunity that must be welcomed.”
“(The captive) is not a tax optimisation tool, but a real tool to manage the risks that lie at the heart of governance… it is a dashboard for the company’s prevention and protection efforts,” he continued.
Wild stressed that captives help companies manage and transfer difficult and emerging risks. “A captive is a means to cool down the hot potato thrown to future generations,” he said.
Philippe Cotelle, AMRAE board member and vice president of Ferma, thinks the recent announcement from the French Treasury is a very positive move in line with an overall effort to make the French economy more resilient.
“The idea is to basically enable you to have the same solution in France that you could have in other countries but right next to you in France. This would enable you to broaden the portfolio of companies that could be interested, not just the largest corporations. This would allow these companies to cope with the tension in the insurance market and foster a better understanding of exposures looking forward,” said Cotelle.
“If you understand the exposures better then you can develop the right risk management approach and identification and management of claims. The return on investment needs to be demonstrated for SMEs. I don’t really know whether this will happen and at what pace but there is a real hope. There is growing expertise in France to help develop this and it needs to be made simpler and smarter. The brokers have a real role in developing this market in France,” he added.
Brigitte Bouquot, former president of AMRAE, risk manager for Thales and board member of its captive, said: “The rules will enable companies to set up captives in France in an effective and attractive way. It will be a game changer, an important development for risks, for companies and for the national economy. Companies must take back the control of their destinies when it comes to risk management and insurance.”
Zaiella Aissaoui, risk and insurance director at Bouygues Construction, added: “We are thinking about the creation of a captive. The analysis is ongoing. The changes from the French Treasury does not impact the decision but only the final location. If the financial conditions could be the same we could think about a French location.”
Francois Malan, head of internal control and director of risk at Eiffage, agreed with his AMRAE colleagues that this news from the Treasury is very positive. But he stressed that setting up a captive is no quick fix and is just part of the wider risk management solution that needs to be “sold” to the board.
“This is a positive development. But this is part of the solution not the solution. A captive cannot perform miracles. For a captive to work you need deep knowledge of your risks. The group also needs to appreciate that this is a long-term project not a quick fix. Explaining it to your board can be a challenge. You need skill and experience to do this,” said Malan.
The head of risk and insurance at Tereos, Sophie Maguer, agreed that the focus needs to be on risk management above all else. “Due to the current insurance market context, a captive becomes an essential tool for certain activities or certain branches of insurance, hence the work of AMRAE for the promotion of the use of captives in France. I think this will really encourage companies to create captives to better manage their risks,” she said.
AMRAE treasurer Alain Ronot stressed that proving your commitment to risk management to the insurance market is a key advantage of having a captive.
“Firms that use a captive are able to better manage their proper risk exposures in the mid and long term. Having a captive enables you to show to the insurance market that you have confidence in your risk so that during the hard market it enables small, middle-size and multinational groups to find insurance solutions when the market is not prepared to complete insurance programmes. The new law in France supporting reinsurance captive set-up is undoubtedly going to increase the creation of captives in France, especially with the hardening insurance and reinsurance market,” he said.
Wild said the push for more attractive captive rules in France was needed because the insurance market has become more risk-averse. This challenge needs to be tackled using the captives as a tool, he added.
“The captive does not replace insurance but it is a way to catch up with insurance and meet again. I call it a rocket. At the base of the rocket is risk management – identifying and understanding risk. Then the next layer is self-insurance, and then you use insurance. When that is all soaked up then you may go to the state,” he explained.
Insurance market still tricky
Anne-Marie Fournier, risk manager for luxury goods group Kering, agrees with many of her peers across Europe that a big problem in negotiations with insurers has been the apparent loss of local decision-making at underwriters.
“There is a disengagement leading to less professional answers and less margin for action at individual country level when all decisions have to be referred to foreign authorities and all this process leads to a reduced risk taking mentality. On the other hand, there are more adapted tools that have been recently developed to better assess risks and quantification of consequences,” she said.
Fournier is optimistic that these tools will help deliver a more positive market this year and beyond. “When these tools are well used, we receive more feedback and the ability to explain internally where we come from. I see a softer market in 2023, more understanding insurers with more individual empowerment showing the end of the fear to underwrite corporate risks which was visible during the last three years. Back to core business with the hope that we will together monitor the extreme exposures!” she said.
Cotelle is concerned about the longer-term commitment of the commercial insurance market.
“Property was traditionally less of a tension but this has really changed and become a lot more challenging, basically because of climate change. If you look at the trend, 15-20 years ago corporate insurance was a really important line for the insurers. But now I think it is regarded as more volatile and we have seen a push back from the insurers in recent times as they seek to allocate more capital to less volatile lines. This is a big concern for the corporates,” he explained.
Of course, insurers risk losing significant levels of premiums over time as insurance managers are forced to bear more and more of the lower risk layers. This would mean the market has less premium to meet claims, creating a viscous circle that could potentially lead to a dramatic loss of relevance for the commercial insurance sector, suggested Cotelle.
“The insurers need to be careful. In the short term, moving away from the lower layers may reduce volatility for insurers but they will also have fewer funds to deal with large losses and thus in the longer term become more exposed to volatility higher up the tower. Therefore, we need to work together more effectively,” he said.
Sophie Mageur, head of risk and insurance at Tereos, stressed how challenging renewals have been over the last few years and how difficult they remain. The greater use of captives will help, she said.
“The renewals of the last three years have been very difficult, with capacity reductions, restrictive policy wordings, premium and deductible increases, strong requirements in terms of risk quality. It seems that the 2023 market is still complicated, especially in certain sectors such as cyber, contamination, general liability, natural events and supply chain risks,” she said.
“The creation of a captive will make it possible to overcome certain market deficiencies, but it will have to be associated with strong internal risk management, with the implementation of appropriate prevention and protection plans,” continued Maguer.
Malan is worried about the recent failure of insurers to seemingly recognise risk management investments and loss records. He is also concerned about the churn of talent in the underwriting community.
“If claims have increased then perhaps it is fair, but some insurers just imposed 10% increases with no reference to risk management or loss record,” he said.
On loss of talent he added: “There is a problem of turnover because a lot of people move from one insurer to another and so you can lose a lot of skills and knowledge of your risk and have to explain it all over again with the new person. It is the same with the brokers. This is a real challenge.”
“Also, the new people do not necessarily have the tough market experience and do not know how to deal with such a market. It seems as if the brokers are trying to deal with too many issues with too few people and this affects service levels, which is particularly important when dealing with claims,” added Malan.
And, unfortunately, he, along with his peers at AMRAE, does not expect the situation to improve any time soon. “This was a tough renewal. Not necessarily worse than last year but still tough and I don’t expect it to change soon,” said Malan.
