European captives are regulated insurance entities, FERMA reminds the Organisation for the Economic Co-operation and Development (OECD).
Refusing to classify European captive insurance companies as “regulated financial services” could undermine the valuable risk management function they fulfill for their owners; the Federation of European Risk Management Associations has told the OECD.
This comment reflects FERMA’s response to the public consultation on Amount A of Pillar One, which is the latest installment of the OECD’s work on Base Erosion and Profit Shifting (BEPS). FERMA provided its comments on the technical details of the first pillar of a two-pillar solution, agreed in October 2021.
FERMA stated its support for the OECD’s push to modernise tax systems but argued strongly against the latest proposals that do not treat captive (re)insurance undertakings as ‘Regulated Financial Services’ (RFS). FERMA reminded the OECD that captives domiciled in the EU are already regulated under Solvency II and as such meet all requirements set up by the OECD for any undertaking to be recognized as RFS. FERMA emphasized there is no specific reason to unfairly single-out captive (re)insurance undertakings and prevent them from being recognized as RFS since they meet exactly the same requirements as all other insurance and reinsurance undertakings which will benefit from the exemption.
Laurent Nihoul, FERMA board member with responsibility for captives, said: “Captives perform genuine and heavily regulated (re)insurance activities by mobilising capital to cover (re)insurable risks in exchange for an arm’s length premium. Solvency II clearly recognises them as insurance undertakings. They also add operational efficiency to their owner by helping to build better awareness of cost of risk and loss control over a longer-term. In this respect, captives play an important role in protecting companies’ assets and as such significantly contribute to the resilience of the European industry.”
In its commentary to the OECD, FERMA stressed that captives can support enterprises in managing cyber and other large and complex risks. This has become increasingly important as the capacity in the commercial insurance market for such risks has contracted and become more expensive. “Captives are efficient risk management and financing vehicles that supplement the imperfect offer from the private insurance market to large commercial insurance buyers,” said Laurent Nihoul.
In FERMA’s 2022 European Risk Manager Report, 33% of respondents noted a large reduction in cyber insurance over the past two years, and 18% said natural catastrophe coverage had shrunk. Looking further ahead, 41% of the respondents said they were concerned that some locations or business activities could become uninsurable.
Nearly half the respondents to the survey (47%) said they were considering using a captive in 2022 to better face risks to come. This compares with just 15% in 20182. Risk managers said they expected to make more use of their captives for all lines of business over the next two years.
As FERMA’s report Captives in a post BEPS world stresses, “Captive insurance can make a real contribution to the enterprise risk management of multinational groups while at the same time complying with fiscal and tax regulations”.
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