Captives are defined in the Solvency II Directive and benefit of the general principle of proportionality as well as of simplifications as regards the calculation of the SCR and the MCR. The need for other simplifications, especially as regards reporting obligations, was addressed in the 2020 Solvency II Review. EIOPA issued a draft opinion on the supervision of captive (re)insurance undertakings with a focus on intra-group transactions (especially cash pooling), on the consistent application of the Prudent Person Principle and on governance-related aspects in connection with key functions and outsourcing requirements.
General aspects
Captive Insurance Company is an insurance company established by another (usually non-insurance) company or a group of companies to provide insurance coverage exclusively for the risks of its shareholder and/or of the affiliated companies of its shareholder. Captives are mainly used to optimize insurance cover, to reduce costs for insurance coverage, to have tax deductible insurance premiums (as opposed to non-deductible contributions to the capital reserves) at the insured company, to get access to the reinsurance market and possibly by ‘bundling’ the group’s demand for insurance coverage, get better rates at the reinsurance market or to find insurance cover for 'hard-to-place risks', e.g. cyber risks, elementary risks, risks which are excluded in the insurance coverage to find at the market or deal with other restrictions such as sanctions. Captives are defined in the Solvency II Directive and benefit of the general principle of proportionality as well as of simplifications as regards the calculation of the SCR and the MCR. The need for other simplifications, especially as regards reporting obligations, was addressed in the 2020 Solvency II Review.
In principle, captives must meet the same regulatory requirements as conventional insurance companies. This means that the companies may only be founded in a certain legal form due to the legal form requirement, in Germany for example as a stock corporation (“Aktiengesellschaft”, “AG”) or Societas Europaea (“SE”), and must go through the licensing procedure with the insurance supervisory authority BaFin. BaFin follows the principle of 'same business, same risks, same rules'. At first glance, this may appear to be a disadvantage, but on careful consideration, the several motives mentioned above may outweigh this.
On 2 July 2024, EIOPA issued an opinion on the supervision of captive (re)insurance undertakings with a focus on intra-group transactions (especially cash pooling), on the consistent application of the Prudent Person Principle and on governance-related aspects in connection with key functions and outsourcing requirements. The purpose of this Opinion is to facilitate risk-based and proportionate supervision of captive (re)insurance undertakings and to further harmonize supervisory expectations in the areas addressed, in the context of creating a level playing field within the EU. While further convergence of supervisory practices is necessary, national competent authorities (NCAs) may take into account national specificities of the captive (re)insurance sector when implementing the principles contained in this Opinion.
Notably, France has recently issued a law which now allows captive reinsurance companies (with effect from financial years beginning on or after 1 January 2023) to have tax-deductible contributions to a further provision, so called "provision pour resilience".
Next steps
We observe the regulatory landscape of captives in jurisdictions around the world, support our clients with every aspect of captive insurance, including handling risk-distribution and risk-shifting analyses, captive formation and captive corporate governance, and we advise our clients on the establishment, operation, relocation and utilization of a captive as well as assist with insurance documentation and compliance for all issues affecting captives.
Authored by Dr. Coco Mercedes Tremurici, and Dr. Christoph Küppers.
