Interest in captives on the rise in Italy as hard market bites

A rising number of Italian companies are looking to set up captives to help them cope with the continued hard market, according to leading members of Anra, the Italian risk and insurance management association. During a roundtable hosted by Commercial Risk with the association in Milan for the annual Risk Frontiers Europe survey sponsored by HDI Global and Charles Taylor, risk managers said that falling capacity and ever more restrictive wordings for key lines such as cyber have been a problem. So risk and insurance managers must focus more than ever on digging deeper into their risk profile and presenting their risk management efforts. Having a captive helps because it really focuses the mind. But the information demanded by insurers, notably also on ESG strategy and performance, have become onerous and, when combined with reduced decision-making capability at the local level, has made life difficult for risk managers in Italy and those across Europe. Using a captive, though, helps with the management of ESG risks, according to experts, and perhaps Italian risk managers are waking up to this further advantage. Anra did open discussions with IVASS, the Italian insurance supervisor, about captives back in 2021 to see if the environment could be made more attractive for Italian companies to set or relocate their captives “onshore”, as happened in France. No changes have been made so far but, as Anra pointed out at the time, it is possible to create captives in Italy under Solvency II. While the corporate tax rate may be higher than in domiciles such as Dublin or Luxembourg, many captive owners have been topping up the tax payments to satisfy transfer pricing rules anyway. And it was reported earlier this year that IVASS is taking a more positive view of captives and so a number of leading Italian firms are looking to relocate their captives to Italy, possibly this year. Marco Terzago, Anra board member and head of risk control for SKF, the world's largest bearing manufacturer, sees lively interest in captives in Italy given the current market conditions. “How to deal with the hard market? Captives is a good answer for a lot of colleagues at Anra, since many of them who have never thought about this solution are currently looking at setting up a captive. The pandemic showed once again that we really need a proper understanding of our risk profile, and a captive is a risk financing solution that truly forces its parent company to move towards this direction. In this way, the parent company increases its risk knowledge and can handle risks that the insurance market is not prepared to handle,” he said. “My company was one of the first to set up a captive in Sweden back in 1976. Captive management was reporting to finance and treasury until 2020, then it switched to legal and compliance, so the benefits of the captive had to be proven again. This process had been helped by the market momentum, with lines such as D&O, cyber and PD/BI seeing rate increases between 40% and 200% or more. In the end, it was really quite easy to show the benefits of using a captive solution,” said Terzago. Carlo Cosimi, head of group risk and insurance at Italian multinational engineering group MAIRE and president of Anra, agreed with his fellow committee member. “Captives are a good option. This has been a challenging period for many, with rising deductibles, restricted wordings and a more selective approach to risks. The information on risks you are asked to provide has escalated. Cyber is becoming a nightmare in this sense because each carrier has different questions and we need to set up different meetings with the head of security and IT manager. It has become very complicated and not all the market is willing to provide coverage. There has also been a loss of local flexibility as the underwriters need to get the green light from HQ,” he said. Paola Radaelli, Anra vice president and senior risk management consultant at Strategica Risk Consulting, said a big problem is the rapidly evolving nature of risk and lack of data. “It is difficult for the insurers with this fast-changing risk, rising threats and volatility. It has become increasingly difficult for the insurers to analyse the risks. Risk managers need to look at the long-term mitigation options and seek out the data. Both risk managers and insurers have a challenge with data,” she said. Gabriella Fraire, insurance manager at energy and telecoms cable systems firm Prysmian group, and vice president of Anra, appreciates the challenge for insurers but feels they need to do more. “This is an effort the insurance market needs to make to remain relevant. Insurers need to find the data and we need to negotiate with a partner that understands your risk,” she said. Cosimi added that while captives appear to be a good option currently, it is not easy to set one up. “There is the cost of collateral, for example, if you choose the reinsurance model. There is a lot of cost to be paid to the fronting insurer and this has risen in recent times. You need a minimum value of premium too,” he pointed out. Valentina Paduano, Anra board member, chief risk and compliance officer at digital healthcare group Dedalus, and chair of Ferma’s Sustainability Committee, said she fears there is a different pace of evolution between risk and insurance, which is a worrying trend. “In my experience, the evolution of risk management is very different to the evolution of the insurance market. They need to respond to the needs of customers, but this is not happening enough,” she said. Cosimi pointed out that this is particularly a problem in the green transition. “If you are a smaller company transforming waste to energy, there is no insurance cover available – it is considered a problem not an opportunity too often. How can we make this transition and push the circular economy without cover?” he asked. Annamaria Oliva, chief risk officer at aerospace, defence and security multinational Leonardo International S.p.A., and an Anra board member, said that the whole process needs to be re-thought if the insurance market is to retain relevance. “The core problem is that the insurers try to cover everything with standardised contracts, not bespoke. This is a big problem. We need to change the process. This is the key challenge,” she said. Terzago added that brokers need to play their part in this effort too. “The demand for innovation and non-standardisation from the insurance sector in this rapidly evolving economy needs the brokers to step up to the plate and add real value and innovation, and not just join the insurers in profiting from the hard market,” he said, echoing the thoughts of many of his peers in Italy and around Europe.

Interest in captives on the rise in Italy as hard market bites

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