FINANCE - INSURANCE

Thierry Flamand

Renewed interest in captives, says head of insurance regulator



Thierry Flamand, director general of the Supervisory Authority for the Insurance Sector (CAA), says cooperation between regulators in different countries is common when insurance groups have foreign subsidiaries, but the lead agency is where the group has its headquarters. Photo: Romain Gamba/Maison Moderne

Thierry Flamand, director general of the Supervisory Authority for the Insurance Sector (CAA), says cooperation between regulators in different countries is common when insurance groups have foreign subsidiaries, but the lead agency is where the group has its headquarters. Photo: Romain Gamba/Maison Moderne

They have a Luxembourg head office and branches abroad: how does the insurance regulator supervise these companies? An industry competitiveness update with CAA director Thierry Flamand,

Thierry Flamand, director general of Luxembourg’s Supervisory Authority for the Insurance Sector (CAA), discusses how the agency checks on companies that have a part of their workforce abroad and a headquarters in Luxembourg, which has become more common since Brexit. The same procedures apply when they have a reinsurance subsidiary abroad or when companies create their own in-house insurance companies--a captive insurer--to remain competitive in a tight market.

Aurélie Boob: One of the European Insurance and Occupational Pensions Authority’s latest consultation papers addresses the functioning of insurance companies with a European headquarters, but which have retained some of their “critical functions” in the UK, so-called ‘Brexiters’. How do you ensure your regulatory duties in these types of cases?

Thierry FlamandThierry Flamand: There are several situations in relation to this consultation paper that are targeted. We have operator profiles which, for the most part, do not pose any problems. The Luxembourg model of Brexiters is to have a head office in Luxembourg--which is growing--and European branches. They are asking for the key functions to be repatriated to Luxembourg [management, finance, underwriting]. However, the models that have been repatriated to Luxembourg, especially in non-life, are those where underwriting is still carried out by the branches, which have the largest number of employees. This is the model that existed before Brexit.

However, there is still a building, staff and sometimes key functions in the former headquarters in London. There may still be dependencies on London... We are putting pressure on the operators to gradually reduce these. We have about 13 Brexiters [12 non-life and 1 life], and brokers. For some, the transfer was done immediately, for others, it is done more gradually, because there are operational constraints.

Of course, as the supervisor of the country of establishment, I have the right to request checks in foreign branches. Sometimes the CAA works with the supervisory authorities of the country of the branch as a matter of cooperation.

If the Brexit consultation paper is implemented as it stands, what will the insurance market look like in 5 years?

It’s complicated to predict. They are mainly active on a cross-border basis and therefore dependent on the economic situation in neighbouring countries. If there is significant growth in France or Germany, there will be a strong development of insurance, but few additional players. In Luxembourg, posts are expensive. Overall, the premium pool is increasing, but the number of players is decreasing, which is why our indicator is not the number of players. Most of the consolidation in life insurance has already taken place in recent years.

Is it normal and legal for an insurance company based in Luxembourg to have its own reinsurance subsidiary outside Europe, in perhaps Bermuda or Jersey?

Reinsurance is, by nature, international. Bermuda is historically a major reinsurance centre, particularly for natural catastrophes. Some companies are considered, from a solvency point of view, to be equivalent to that required by the Luxembourg or European prudential regime. So, on the strength of this equivalence, we give them the same credit. If they belong to the same group as the Luxembourg-based insurance undertaking, the update of the Solvency II Directive has strengthened the possibility of group supervision. This means that the CAA acts with the regulatory entity in Bermuda or in Switzerland, for example.

But if the reinsurance company is based in a country where the prudential framework is not equivalent, the Luxembourg head office will be required to have more own funds, to offset the solvency risk.

Is the level of reinsurance--the amount ceded in the event of non-payment or bankruptcy--higher in periods of inflation?

Yes, this raises the question of the interaction between insurance and reinsurance. In certain periods, ceding risk is not expensive, the reinsurer has a greater or lesser risk appetite, which influences rates. We are now in a phase where reinsurers are willing to take the risk at higher rates.

An example: an industry that manufactures and sells products is covered in civil liability and credit insurance. But premiums have really exploded in recent years. Where the industry could easily cede risk to an insurance company which in turn ceded risk to a reinsurance company, this is no longer the case. This is pushing industries to create captive insurance companies, i.e., to set up their own insurance companies, to control costs. There is a renewed interest in captives in this respect, because there are few alternatives.

We have a regulatory system, it is what it is: take it or leave it
 Thierry Flamand

 Thierry Flamanddirector generalinsurance regulator CAA

This renewed interest in captives is creating competition between countries. In France, the sector is putting some pressure on parliament to speed up the law that will make it easier to set up captives in Paris. What does this mean to you?

Since there are no real alternatives, I think it is rather positive that the French legislator recognises the interest of captives. We then need to create an ecosystem. In Luxembourg, it has existed for decades and works very well. I don’t see this as a threat to our competitiveness. We have a regulatory system, it is what it is: take it or leave it. Maybe we ask too many questions and they don’t like it?

In the past, large French groups were attracted to Luxembourg, there was a time when it attracted companies for credit insurance, because certain countries were blacklisted by the insurers... But tomorrow, they can just as easily go to Ireland. I think it creates more of a competitive market. It is a relatively efficient risk management tool for groups.

Originally published in French by Paperjam and translated for Delano. This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.