Regulatory barriers holding back captive growth in Italy

Experts who took part in a recent webinar organised by Italian risk and insurance management association Anra concluded that, while recent regulatory developments in the country are positive news for the development of captives, Italy will remain unattractive as they would be still directly supervised under Solvency II.

Historically, Italy has never been an attractive country for captives. One of the main reasons is the lack of a dedicated legislative and regulatory framework, meaning that it does not favour a medium- or long-term investment option for the creation of a captive.

It was hoped that the harmonisation of the national legislation carried out by national supervisor IVASS with the EU’s Solvency II capital adequacy and reporting framework would create a more favourable situation. But it is not enough. Anra and experts from Zurich discussed the options during a recent webinar focusing in particular on the solution of protected cell companies (PCCs).

As explained by Giacomo Mariani, head of large brokers and CI customers at Zurich Insurance Group Italy, captives globally recorded a constant growth from 2005 to 2015, then stabilised until 2018. At the same time, the number of PCCs has continued to increase in recent years and has gained in percentage on traditional captives.

A PCC is a standalone insurance company consisting of a core cell and an unlimited number of independent (rented) cells. The core cell provides the necessary capitalisation and is basically independent of the other cells. The rights and liabilities of one cell are legally segregated from those of other cells. The aim of the PCC is to combine the advantages of the rent-a-captive and the single-parent captive concept while ringfencing each cell from any financial instability of neighbouring cells.

The advantages of a traditional captive are well known, especially in a hard market period in which many risks can’t find coverage on the market, or can be insured but at much higher costs than a few years ago.

The main ones include a reduction in the total cost of risk, more flexibility in risk management, the possibility of redistributing profits within the parent company and greater transparency on data relating to claims, which would otherwise be held by the insurer.

“All these advantages also apply to PCCs, which however guarantee additional benefits thanks to their structure,” explained Mr Mariani. With PCCs, the captive part is replaced by the protected cell company, the core, which can capitalise the cells. Alternatively, the cells can be capitalised by the policyholder.

All assets and responsibilities related to a single cell are legally and financially independent of each other, which is an advantage in the event that a cell should fail or perform negatively. In addition, PCCs are easier to implement and use, since they have lower implementation and administration costs than a traditional captive.

An example of the use of a PCC was explained by Paolo Terazzi, group accounting and finance director at Amplifon, an Italian global leader in hearing care, present in five continents with core businesses in North America, east Asia and Europe.

The company’s need was to provide the business with a tailored solution that could help in boosting retail sales, keep profitability from insurance business in the group, manage the insurance business in full compliance with insurance regulation and manage the intrinsic reinsurance risk.

Mr Terazzi explained that opting for a PCC allowed for an immediate start, efficiency in terms of capital requirements, tax structure and dividends, partnering with Zurich to share the risk and consolidation of the PCC in the group figures.

“Italian organisations show they appreciate captives more and more, yet Italy is still struggling to position itself as a truly advantageous domicile,” summed up Carlo Cosimi, president of Anra. In Italy there is still no dedicated legislation, such as there is in Luxembourg, Ireland and Malta, and this is the core problem, he explained.

“It is possible to register a captive, of course, however not with an ad hoc licence but with a commercial license, which implies that the company must meet Solvency II requirements and also all the regulatory requirements that commercial companies are required to adhere to. Currently, this still represent a strong disincentive to choose Italy as a domicile,” concluded Mr Cosimi.

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