Time is ripe to build captives and ART in Spain

Spanish risk managers agree that the hard market has forced a healthy review of risk financing and retentions. They would like to see the Spanish government follow France’s lead and implement a more captive friendly environment but are not holding their breath. Not many Spanish companies have captives but those that do are using them intensively in the hard insurance market. Even risks such as cyber and professional indemnity (PI) are now retained in such instruments. Risk managers that participated in the Spanish leg of our Risk Frontiers Europe survey believe the use of risk retention tools need to be disseminated and promoted in Spain, and argue that new, friendlier rules would help them to flourish. In the meantime, however, the insurance market can help clients by innovating. The use of captives in the current market and beyond is supported by Ramón de la Vega, risk financing director at telecommunications group Telefónica. “We used our captive for all kinds of insurance programmes, be that property, cyber, general liability, E&O, crime, terrorism and political violence or FIPI. Also motor fleet and employee benefits. It makes business sense. The more lines I have in the captive, the more diversified its risk is,” he explained. “We can also have access to information that gets lost on the way, as the risk goes through the broker, the insurer, the reinsurance broker and the reinsurer. It can be vital information or not, but once you have a 30-year loss history, it helps to better understand our risk,” he added. “We are retaining more risks, and not only via our corporate captive. We are also using separate cells for specific big and complex infrastructure projects when we want to retain risk in the project’s specific balance more than in the holding balance,” said Daniel San Millán, the president of Igrea and risk manager at construction firm Ferrovial. Risk retention has become a topic of interest for Spanish companies as capacity was withdrawn by insurers from segments such as cyber and PI. In March, Spanish risk management associations Igrea and Agers launched a handbook to help Spanish companies better understand risk retention. In San Millán’s view, a Spanish legislative initiative similar to the one implemented in France recently could give the process a boost. “We would love to see specific legislation about captive companies implemented in Spain too. Today, we are told that it is possible to set up a captive in Spain under the existing legislation but the rules do not follow proportionality principles. The same rules that are applied to captives are applied to reinsurers,” he said. “So it would be great if the legislation was reviewed in Spain, that some kind of specific rules were created for captives. It would be very interesting for the country that all the universe around captive companies were integrated into the Spanish market,” added San Millán. “It is not a tax issue, it is a proportionality and accounting issue, and one that is also about how a company is allowed to build the stabilisation reserve. The stabilisation reserve in Luxembourg, for example, is of the essence. Once the captive is capitalised, one can be bold. The company can then decide whether it will retain more risks or transfer to the captive more lines of risks,” continued Igrea’s president. In the meantime, many companies that do not have a captive are looking at the option very closely. “We still do not have a captive but we are studying it. Not having a captive denies a company the opportunity of a more efficient risk financing strategy,” said David González, director of risk and insurance at construction group Sacyr. “Some years ago, we made studies to find out whether a captive would have been an interesting tool for us, and we discarded the idea. There is no doubt that it would have made it easier to solve some issues during the hard market, but the cost and complexity involved would have been very high too,” said Lourdes Freiria, general director of risks and insurance at construction firm Group San José. “Our sector can still find enough solutions in the insurance market. But we are paying much attention to possible alternatives to retain a higher ratio of our risks… Maybe the renting of a protected cell could be more interesting for us in some particular cases,” she said. The search for efficient risk financing strategies could also be aided by the insurance market. “I believe there is an important business opportunity right now in Spain, if a company wants to bring experts, new products and solutions,” De la Vega said. “Not every buyer can have a captive, or maybe it does not make business or strategic sense for a company to set up one. But there are other options in the market. Medium and small companies may be interested in some kind of supplementary risk transfer tools.” The question is whether the insurance industry has the willingness to invest in innovative products and services in a sellers’ market. “Insurers will never be at the vanguard of innovation. It is a conservative industry, which is reasonable, as one cannot guess what will happen if one provides cover to an unknown risk,” González said. “Many insurers have achieved balanced technical results and they could meet a demand for more innovative and longer-term solutions. But they are often uninterested, they remain entrenched in their positions,” he added. “Long-term agreements, for example, could provide us more certainty and stability in the next few years but they [insurers] are not offering them right now, it is almost impossible to sign LTAs,” pointed out González. “I sincerely believe that, right now, the market is feeling comfortable. Not all [insurance] companies though. Some are trying to be creative and sophisticated,” San Millán concluded.

Time is ripe to build captives and ART in Spain

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