French captive process requires commitment and transparency

The French industrial group that specialises in naval defence design, Naval, was one of the first companies to set up a captive in France under its new and more favourable rules. So Commercial Risk Europe caught up with Ludovic Jung, director risk and assurances at the company, about how the process went, his advice for others considering the same path and benefits from the new Naval Group Ré captive. As the French government finally approved new tax and accounting rules to help set up captives in France back in the summer of 2023, Naval Group was a long way down the road to establishing its own risk retention tool in the country against the backdrop of a difficult insurance market. It was one of the first companies to work with French supervisory body ACPR to set up a reinsurance captive under the new framework, which aimed to turn France into an attractive and viable captive jurisdiction. One and a half years on and Naval Group Ré is used by the company to look for better rates and conditions in five insurance lines, with more likely to be added in the future, Ludovic Jung, director risk and assurances at Naval, told Commercial Risk Europe. “We have placed in the captive risks that are at the heart of our ship building business, nuclear liability risks and transportation risks,” Jung said. “We have made benchmark studies about other risks as well, such as property and cyber. However, for us, the benefit of integrating part of those risks into our captive is not significant enough to justify it.” The choice of risks reflects the motivation behind Naval’s decision to set up its own reinsurance captive. The group felt, during the latest hard insurance market, that there was a possibility it would end up having less control over its risk transfer strategies. The perception was that traditional ways of dealing with the insurance market were no longer delivering the best results. “The evolution of the market, as well as characteristics of our company, enabled us to reflect about a new way to share our risks with the insurer, after an analysis of our risk profile,” Jung pointed out. The captive was identified as the best tool to re-establish a balance in the buyer-insurer relationship. Naval registered its reinsurance captive in December 2022 but still required the approval of ACPR. That came in June the next year, exactly when the new tax and accounting rules were approved by parliament. Discussions about the rule changes had been going on for years, with active participation from France’s risk management association AMRAE. To a certain extent, therefore, Naval Group Ré was one of the guinea pigs of the new process. Jung said the process was efficient, even though it took many meetings with regulators and a full six months to conclude. But the first decision that needed be made by Naval was where the new captive should be domiciled. It considered both Luxembourg, the traditional home for French captives, and France, which at the time was on the brink of adopting the new rules. In the end, the company chose France because it preferred the captive to remain close to its Paris headquarters. “We came to the conclusion that we needed to look objectively at it, and that both domiciles had advantages and disadvantages,” Jung said. “The advantage of the French domicile was, clearly, the geographic proximity. We are based in Paris, we have a French history, and we need fronting insurers that are based in Paris.” The fact that the French state owns a majority stake on Naval had to be taken into account, as well as the company’s long history in the country. Its origins date back to 1631, when the legendary Cardinal Richelieu created a number of arsenals to strengthen the French navy’s fire power. But Jung stressed that governance factors were decisive, as Naval is well-used to France’s compliance framework. The practicality of working with the firm’s usual set of insurers and brokers played a part too. “We would have to open an office in Luxemburg or hire a manager to have an address there,” Jung noted. “We did not feel very comfortable with that, while in France our governance is already completely integrated.” The group hired consultants 2RS to help analyse which risks should be transferred, draft loss reports and perform other technical work. In Jung’s view, Naval adopted a transparent approach that helped smooth out the approval process, although it was hard work and time-consuming. “Our dealings with ACPR developed in very quick pace. We did not skip any steps, we just adopted a very open approach,” said Jung. “We told them that we would put everything on the table and we would be ready to answer all the questions immediately, so that we did not lose momentum.” The hardest part of the process was presenting the case for opening a captive to an analyst empowered by ACPR. Jung said the analyst was not afraid of asking questions about why the company really needed the vehicle. 2RS accompanied Jung’s team along the way and helped raise enough data to manage fears about the viability of, and need for, the captive. Jung believes it was key that Frank Le Rebeller, senior executive vice-president of finance at Naval, was appointed chairman of the captive’s board. Other group executives were chosen to sit on the board, while Jung was picked to be the managing director. “All things considered, in my daily work or even for the daily activities of the group, nothing has changed. In the end, premiums are paid to an insurance company and claims are filed to an insurance company,” he concluded. The captive got the green light on 21 June 2023. By the end of that year, Naval Group Ré published its first report, and since then Jung has answered questions from financial authorities on subjects such as terrorism financing, conflicts of interest and outsourcing. Jung said that the captive will post even better first full-year results than expected for 2024. All that while giving the group a stronger hand in negotiations covers with underwriters. And he added that the extra work from managing the captive fits well with his daily job as the group’s risk and insurance manager. “All things considered, in my daily work or even the daily activities of the group, nothing has changed. In the end, premiums are paid to an insurance company, and claims are filed to an insurance company,” he concluded.

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