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Future of captive insurance companies in Europe

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This presentation will present the unique features of a captive insurance company and what makes it an undisputed part of the risk manager toolbox. It will help you to:
1/ show the value of a captive insurance as a genuine risk management tool
2/ understand what to expect from the Solvency II revision in 2020 as regards captive insurance
3/ know more about the state of play of BEPS implementation in OECD countries

Published in: Business
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Future of captive insurance companies in Europe

  1. 1. www.ferma.eu LIVE WEBINAR #3 – FOLLOW US @FERMARISK #FERMAWEBINAR FERMA Risk Leadership at the heart of Europe Suscribe to our newsletter: www.ferma.eu Contact us: enquiries@ferma.eu
  2. 2. www.ferma.eu FUTURE OF CAPTIVE INSURANCE COMPANIES IN EUROPE LIVE WEBINAR #3 @FERMARISK #FERMAWEBINAR
  3. 3. www.ferma.eu
  4. 4. www.ferma.eu Polling question #1 Are you a captive user? YES / NO / PLANNING TO
  5. 5. 5Sustainable city – open to the world Why does a city have a captive? Försäkrings AB Göta Lejon
  6. 6. 6Sustainable city – open to the world City of Gothenburg in brief 19 specialist administrations 10 city district committees 63 active companies of which 46 wholly owned 55 000 employees of which 37 700 in the city district committees 564 000 residents 34 billion SEK turnover (€3,18 billion)
  7. 7. 7Sustainable city – open to the world The City of Gothenburg’s organisation Committees City district committees Social Services, Social Care, Local Culture & Leisure Leisure Sports & Associations Committee Park & Nature Committee Transport Transport Committee Other Committees Archive Committee Committee for buying and procurement Committee for Consumers Citizen Services Intraservice Committee Chief Guardian Committee Committee for Allocation of Social Welfare Technical Provision Eco-cycle & Water Committee Environment Environment & Climate Committee Culture Culture Committee Education Pre-school Committee Compulsory School Committee Education Committee Adult Education Commitee Land & Housing Planning Committee Real Estate Committee Commercial Premises Committee
  8. 8. 8Sustainable city – open to the world The City of Gothenburg’s organisation Göteborgs Stadshus AB Regional companies Renova AB, Gryab AB, Grefab AB Energy Göteborg Energi AB + 11 subsidiaries Port Göteborgs Hamn AB Göteborgs Stuveri AB Scandinavian Distripoint AB Commercial premises HIGAB Älvstranden Utveckling AB Scandinavium AB Förvaltnings AB Göteborgslokaler Göteborgs Stads Parkerings AB Internal companies Försäkrings AB Göta Lejon Göteborgs Stads Leasing AB Tourism, Culture, Events Göteborg & Co AB Got Event AB Liseberg AB Göteborgs Stadsteater AB Business Business Region Göteborg AB Lindholmen Science Park AB Johanneberg Science Park AB Sahlgrenska Science Park AB Göteborgs Tekniska College AB Almi Företagspartner Väst AB Boplats Göteborg AB Housing Förvaltnings AB Framtiden Bostads AB Poseidon Familjebostäder i Göteborg Gårdstensbostäder Göteborgs Stads bostads AB Göteborgs Egnahems AB Störningsjouren i Göteborg AB Framtiden Byggutveckling AB Public Transport Göteborgs Spårvägar AB Göteborgs Spårvägar Buss AB Göteborgs Spårvägar Trafikantservice AB
  9. 9. 9Sustainable city – open to the world Göta Lejon’s mission Providing insurance solutions, claims management and risk management support to the City of Gothenburg´s operations.
  10. 10. 10Sustainable city – open to the world History Many loss events at schools and preschools in the City of Gothenburg. 1991 First insurance signed 1992 Installation of alarm systems started at schools/preschools 1994 The reinsurance company Göta Re was started 2006 Göta Lejon started to insure vehicles and trams 2009 Fire at Torslandaskolan 2013 Insurance policy decided by the City council 2015 Göta Re was liquidated 2015 New RM programme, including surveys and client seminars 2017 All of the city´s companies and administrations insured by Göta Lejon
  11. 11. 11Sustainable city – open to the world Why a captive? • Historic reasons, it was hard to insure schools/preschools due to many losses • Need of loss prevention • Contingency reserve could be established • Direct access to the reinsurance market • Resources for loss prevention can be returned to administrations • To handle complex risks and inter- dependencies • Enables a holistic view of insurance solutions for the City of Gothenburg • Other swedish captives:
  12. 12. 12Sustainable city – open to the world Impact of Solvency II • Increased share capital, SEK 100 Millions from owner • The board must meet the higher competence requirements and be fit and proper • Implementation of policies and guidelines • Higher costs for control functions • More extensive reporting • Approximate cost: SEK 3,2 Millions per year Applicable to public sector captives? • No exposure to consumers and no pensions or life insurance • City of Gothenburg rating, AA+ • Taxation of 600 000 citizens Is the cost of control proportional to the risk?
  13. 13. www.ferma.eu The Multinational Corporation’s View ArcelorMittal
  14. 14. ArcelorMittal at a Glance Global Steel and Mining Leader EUROPE Employees: 91,000 Sales: USD 40.5bn Steel Shipments: 41MT MINING Employees: 28,000 Sales: USD 4.2bn Iron Ore: 58.5MT Coal: 5.9MT Holding and Service Companies + Eliminations Employees: 1,500 Sales: - USD 5.7bn Steel Shipments: -2.4MT 2018 Sales (USD billion) 76 Ebitda (USD billion) 10.3 Steel shipments (million tonnes) 83.8 Workforce 210,000 Footprint (countries) 60+ ACIS Employees: 42,000 Sales: USD 8bn Steel Shipments: 11.7MT NAFTA Employees: 27,000 Sales: USD 20.3bn Steel Shipments: 22MT SOUTH AMERICA Employees: 20,000 Sales: USD 8.7bn Steel Shipments: 11.5MT 14
  15. 15. www.ferma.eu The main advantages resulting from the use of a captive within a global risk and insurance management strategy can be summarized within three main dimensions. (Re)insurance Basics Risk Control Finance & Strategy About the technical elements relating to (re)insurance covers and pricing structure as well as to savings or improvement in the purchase of traditional covers Considerations about the role of a self- financing vehicle in the enhanced possibilities of risk management and control improvement Additional capabilities to optimize the whole financial policy of a Group. Captives: Impact and Benefits Why using a captive?  Reduction or stabilization of insurance premiums at Group level.  Direct access to worldwide professional reinsurers.  Tailor-made insurance programs.  Taking advantage of an organization’s non-correlated risks  Solution to market inadequacies (coverage for non-insurable or overpriced risks).  Improved claims handling.  Improved data collection, loss control and prevention measures.  Consolidating international programs in line with local needs and risk profiles.  Cash flow benefits and investment income  Cash Pooling mechanism and use of assets  Capture of insurance profits.  Negotiation tool  Insurance operations enhancement
  16. 16. www.ferma.eu Three Basic Rules Frequency Impact Low impact Medium to high impact Catastrophe Retention TransferRetention / Transfer Losses Time Actual commercialpremium Average premium Ideal trend 1 Self-management of own risk profile 3 Total Cost of Risk (TCoR) 2 Budget Optimization
  17. 17. www.ferma.eu Examples (1/3) Central Underwriting Tool for International Insurance Programs MOTHER COMPANY Subsidiary / Country 1 Subsidiary / Country 2 Subsidiary / Country 3 Subsidiary / Country 4 Subsidiary / Country 5 Local insurer 1 Local insurer 3Local insurer 2 Local insurer 5Local insurer 4 (RE)INSURANCE CAPTIVE (RE)INSURANCE MARKET (re)insurance cash flows (premiums and claims) 1 2 3 1 2 3 Main Objectives  Operational efficiency  Optimized negotiation power for the lowest possible cost  Standardized and best-in-class quality of cover Individual Policies at Entity Level Insurance Centralization at Group Level External (Re)Insurance Risk Transfer
  18. 18. www.ferma.eu Examples (2/3) DIC/DIL Traditional Program Deductible Captive DIC / DIL
  19. 19. www.ferma.eu Examples (3/3) Harmonizing Local Deductibles within an International Program International Program Deductibles Captive Subs. 1 Subs. 2 Subs. 3 Subs. 4 Subs. 5
  20. 20. Wrap Up Key Insights and Takeaways
  21. 21. www.ferma.eu Always bear in mind!... Insurance Vs. Financing We do not « buy » insurance, we finance our claims (except for CAT claims) Premiums = Claims Over a long period of time, claims paid by insurance companies will be recovered through premiums (except for CAT claims)
  22. 22. www.ferma.eu Key Focus Points Consolidation / IFRS Frictional Costs Risk Appetite Cash Out Vs. Cash Exposed Transfer Pricing, BEPS and Tax Aspects Insurance Market Cycles Highly Regulated Environment (e.g. Solvency II) New Skills for Risk Managers / New Strategy? Future Challenges
  23. 23. www.ferma.eu Polling question #2 Does your captive benefit from proportionality measures (reporting, governance…) put in place by the local supervisor in relation with Solvency II? YES/ NO / DON’T KNOW
  24. 24. www.ferma.eu Polling question #3 Which are the proportionality measures applied by your local supervisor to captive insurance companies? 1. Capital requirements / Solvency calculations simplification 2. Reporting (e.g.: frequency and size of QRT, RSR…) 3. Governance (e.g.: pragmatic approach for key functions…) 4. Others Several possible answers
  25. 25. Future of Captives insurance companies in Europe Future of Captives insurance companies in Europe EIOPA – Ana Teresa Moutinho 18 June 2019
  26. 26. 26 Future of Captives insurance companies in Europe Captives in Solvency II Directive • Default: insurance or reinsurance undertakings should include captive undertakings, except where specific provision is made for those undertakings • Acknowledgment: specific nature of captive undertakings • Definition: ‘captive insurance undertaking’ means an insurance undertaking, owned either by a financial undertaking …, the purpose of which is to provide insurance cover exclusively for the risks of the undertaking or undertakings to which it belongs
  27. 27. 27 Future of Captives insurance companies in Europe Captives in Solvency II • Limitations and exemptions of reporting • Simplifications TP • MCR absolute floor • Simplified calculation of capital requirement for: o non-life premium and reserve risk o interest rate risk o spread risk on bonds and loans o market risk concentration
  28. 28. 28 Future of Captives insurance companies in Europe EIOPA Supervisory Statement • Calculation of the SCR sub-module using inputs prudently estimated and leading to prudent outcomes • The result may be used for the next three years • Should not affect the compliance with any risk management requirements • Proper monitoring of any evolution of the risk • Setting of qualitative and quantitative early warning indicators
  29. 29. 29 COM CfA 3.15. Reporting and disclosure EIOPA is asked to assess, taking into account stakeholders’ feedback to the Commission public consultation on fitness check on supervisory reporting: • the ongoing appropriateness of the requirements related to reporting and disclosure, in light of supervisors’ and other stakeholders’ experience; • whether the volume, frequency and deadlines of supervisory reporting and public disclosure are appropriate and proportionate, and whether the existing exemption requirements are sufficient to ensure proportionate application to small undertakings. Future of Captives insurance companies in Europe
  30. 30. 30 COM CfA 3.16. Proportionality and thresholds EIOPA is asked to assess whether proportionality in the application of the Solvency II framework could be enhanced, and in particular in the following areas: • the appropriateness of the thresholds for the exclusion from the scope of Solvency II, as defined in Article 4 of Directive 2009/138/EC; • the possibility to waive certain requirements relating to any of three Pillars of the framework based on size thresholds or the nature of the undertaking or of its risks; • rules for the simplified calculation of sub-modules that form an immaterial part of the Solvency Capital Requirement of an individual insurance or reinsurance undertaking. Future of Captives insurance companies in Europe
  31. 31. 31 The first wave of Consultation beginning-July until mid-October and cover: • General issues on supervisory reporting and public disclosure; • Individual Quantitative Reporting Templates (QRTs), • Solvency and Financial Condition Report (SFCR); and • Financial Stability Reporting. Future of Captives insurance companies in Europe
  32. 32. 32 Future of Captives insurance companies in Europe Supervisory Convergence • Definition of captives business models of captives • Compliance with the governance requirements - application of the proportionality principle and the use of outsourcing • Cross-border issues • Information on business model and related integration in the ORSA process • Investment policies and related asset management strategies • Assessment of reinsurance strategies and related implications for risk management strategies
  33. 33. www.ferma.eu Q&A
  34. 34. www.ferma.eu Polling question #4 Are captives fit for acting as risk incubators and covering new risks like climate, cyber….? YES/ NO
  35. 35. www.ferma.eu • Thank you for your attendance! • To go further: a dedicated workshop “Future of the captive model: showing value creation” will take place at FERMA Forum in Berlin on Tuesday 19 November 2019 • Free registration for risk manager at www.ferma- forum.eu • Replay available soon on FERMA youtube channel CONCLUSION
  36. 36. www.ferma.eu SUBJECT: TO BE CONFIRMED WHEN: SEPTEMBER HOW: email invitation and/or register on www.ferma.eu THANK YOU & JOIN OUR NEXT WEBINAR RECORD YOUR 2 CPD POINTS CONTACT US: enquiries@ferma.eu

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