Luxembourg’s captives ‘thriving’ says AM Best report

The prospect of a tougher renewals season has led to increased use of captives by European companies, according to a report from ratings agency AM Best. But despite the increased use of captives, Luxembourg is the only domicile among the top three that has seen an increase in the total number of captives during 2020. The report, Europe’s Captive Segment Thrives Amidst Hardening Market, states that the hardening of the (re)insurance market, which began as early as 2018, has seen a number of European captives increase their retentions or limits on existing cover. In some instances, captives have expanded into new lines of business as their parent companies look to “increase captive utilisation” and seek “optimal risk transfer” strategies, states the report. It is therefore important for captives to maintain relevant underwriting expertise and sufficient capital levels to cover any increase in underwriting or catastrophe risk associated with writing additional business, according to AM Best. The ratings agency also stresses the importance of innovation to the long-term success of captives. “Well-structured innovation allows companies to develop sustainable competitive advantages and better respond to external challenges such as low investment yields, stagnant growth and deteriorating expense ratios,” states the report. “The success of this innovation is demonstrated by the endurance of the model and by the continuing importance of captives to their parents. Captives make use of their privileged access to data and proximity to risks to develop customised products that cover the changing needs of their parents,” adds the report. “This proximity to risks also enables captives to explore innovative ways to improve loss prevention, gathering loss information and data on risks that provide captives with significant expertise in this field,” it continues. There are three Luxembourg-based captives rated by AM Best – Builders Reinsurance, GreenStars BNP Paribas and Nova Casiopea – which have long-term issuer credit ratings of a-, a+ and a- respectively. All have stable outlooks. In addition, captives have seemingly bucked the trend among traditional insurers in terms of the impact of Covid-19. Whereas the financial market volatility and global economic slowdown led to increased claims activity and reduced earnings for most insurers, the European captives rated by AM Best found the pandemic less of an issue. The majority have a conservative approach to their investment and also suffered less significant underwriting losses, as they tend to operate in sectors that have continued to function throughout the pandemic. And where there has been a reduction in premium volumes, this has typically been offset by a slowdown in claims. The report also highlights some potential opportunities for captives to expand their coverage. This includes making up for the loss in capacity in certain lines as a result of insurers’ integrating ESG factors into their underwriting, and also offering business interruption for Covid-related risks facing the parent company, something that is currently an exclusion for many mainstream insurers.

Luxembourg’s captives ‘thriving’ says AM Best report

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