New rules offer Europe’s captives a mix of relief and challenges: AM Best

European captives face new regulatory challenges and added costs from cybersecurity rules imposed by DORA from January 2025 on the back of moving to accounting standard IFRS 17, according to AM Best. And while captives are likely to benefit from a redrafting of Solvency II’s proportionality rules from 2026, they will still have to apply to be classed as a small and non-complex undertaking (SNCU). Publishing a sector report, AM Best says initial proposals under the Solvency II review sparked hope that captives would be automatically classed as SNCUs and therefore subject to reduced regulatory requirements. However, this was removed as part of amendments agreed by the European Parliament and Council. Instead, it looks like captives will have to apply to be a SNCU and qualify for more proportionate treatment following Solvency II’s review. Captives are set to qualify if they only insure risks within their parent group, limit coverage of individuals under group insurance policies to under 5% of technical provisions, and do not write compulsory third-party liability. “While some stakeholders believe the reforms could go further in easing the regulatory burden on captives, the EC is clearly aiming for a balance between protecting policyholders and reducing the regulatory burden,” AM Best says. National supervisors will have two months to object to an application for SNCU status, although this will be four months during the first six months of the new Solvency II directive, AM Best explains. SNCUs will be granted full use of proportionality measures covering reporting, governance, the calculation of technical provisions, liquidity risk management plans, own risk and solvency assessments and disclosure requirements. The Digitial Operational Resilience Act (DORA), which comes into force in January, will include captives in its scope. The new rules introduce strict cybersecurity requirements for Europe’s insurers. AM Best says DORA includes a proportionality principle to ease compliance for smaller firms, but believes captives “may not benefit”. Captives may be considered as part of their larger parent company and their associated cyber risks, AM Best says. “Together with IFRS 17, DORA adds additional compliance and cost burdens for captives,” it says. New European captive domiciles, led by France following the introduction of captive-friendly regulations, are changing the landscape for Europe’s captive insurance sector, AM Best continues. While the French captive market is “fast growing”, the rating agency says France “is still a relatively new and therefore modest captive domicile”, with an estimated 15 captives licensed at the end of 2023. But as reported by Commercial Risk Europe, many more captives have been granted approval this year or are applying for approval. AM Best says Guernsey held the top spot among Europe’s domiciles, with 199 captives at the end of 2023, followed by Luxembourg with 195 and the Isle of Man at 85. Other captive jurisdictions include Ireland, Sweden, Switzerland, Malta and Gibraltar, which is developing a dual captive regime post-Brexit. The UK has launched a consultation to increase its captive appeal, with more details expected in 2025, while in Italy, although there is no specific captive legislation, several corporates have recently redomiciled existing captives to their domestic market. AM Best expects more Italian companies to relocate their captives to their home market in the next few years, following Prysmian and Enel in 2023 and Eni in 2024. It adds that captives remain a cost-effective risk management tool in an environment of hard prices for commercial property and the impact of social inflation on casualty lines. It notes that captives have expanded beyond traditional P&C risks to lines constrained by capacity, including cyber, some liability areas and credit. But AM Best warns that 2025 is expected to be another challenging year for reinsurance renewals, with many captives highly dependent on reinsurance to provide large limits to parent companies.

New rules offer Europe’s captives a mix of relief and challenges: AM Best

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