Valerie Scheepers, executive board member and head of the non-life and reinsurance department at the Commissariat aux Assurances (CAA), talks to Captive Review about the Luxembourg captive industry this year and what the future might hold for captives domiciled there
Captive Review (CR): What have been the main drivers of growth in Luxembourg’s captive industry during 2023? By lines, industry, parent location, etc.
Valerie Scheepers (VS): Luxembourg has always been a domicile for groups being headed in the EEA, for the vast majority. This trend has not changed over the recent years and is well explained by the geographical location of Luxembourg at the heart of Europe and by a well-developed network for traveling. The lines that are currently the most attractive when creating a captive are parametric, property damage and business interruption (PDBI), and cyber. Usually, after a few years, the programme is changed by adding new lines or by increasing the capacity of existing programmes. There is not a clear trend in the industry sector in which the group operates, however the geographical spread of these groups is usually very broad. These groups are multinationals and they operate from and in several countries.
CR: How have changing market conditions affected Luxembourg’s captive industry during 2023?
VS: The market had already started to harden three to four years ago and the difficulties encountered by several groups in renewing their existing programmes, be it on the level of the premiums or on the cover conditions (layering including the deductibles), have pushed more and more groups to develop an alternative pool of capacity via a captive solution. We don’t expect a change in this respect in the near future.
CR: How many new captive licences were approved in Luxembourg in 2023 up to 30 September 2023?
VS: For the first nine months of the year, four captives have been authorised. It is quite unusual to have received demands out of the last quarter where the licensing process is usually concentrated. In this way, 2023 was a bit exceptional. Our team is working on several new applications targeting an authorisation before the end of the year.
CR: What was the total number of captives in Luxembourg as of 30 September 2023?
VS: As of 30 September, 199 reinsurance companies are authorised in Luxembourg.
CR: What does Luxembourg offer as a domicile that continues to attract captives?
VS: Most of the candidates we meet are emphasising the stability of the regime for captives in Luxembourg; the system has existed for several decades and if it has evolved through this period, the changes always allowed the captive owners to make plans on a long-term basis. Luxembourg also has a high concentration of professionals working in the captive sector and is able to support the captive candidates for the licensing process and, once done, to manage the captive on a daily basis, implementing the strategy defi ned by the board of the captives and structuring the exchanges with the board on several aspects such as compliance, risk management, portfolio structuration, investment management, etc. The captive managers in Luxembourg also need to be licensed by the Commissariat aux Assurances (CAA), which is notably reviewing the fitness and property of the individuals leading the management company as well as the adequacy and sufficiency of the resources. In addition, we are probably the last regulator in Europe devoted to the (re)insurance sectors only. The members of our board all have a very good knowledge of the captive sector and maintain an open dialogue with both captive managers and owners. It is the guarantee that we can take quick and informed decisions and give to the captive sector the attention it deserves. Finally, and as previously mentioned, Luxembourg is at the heart of Europe, and for EU groups with a multinational exposure this central location matters.
CR: What recent or upcoming regulatory changes should Luxembourg-based captive owners be aware of and preparing for?
VS: The revision of Solvency II is still under discussion and the latest exchanges on this matter go in a direction that is rather positive in terms of recognising the specificities in the risk profile of a captive, and in particular its limited impact on consumers. There are no changes from a national regulatory standpoint foreseen at this stage.
CR: Are there any changes to Luxembourg’s legislation the Commissariat is considering to make better suited to the evolving needs of captive owners?
VS: The CAA wants to simplify the exchanges with captives regarding the notification files that are required by law, like change of business plan or change of shareholder. A new form has been introduced this year on the change of business plan with a two-step approach where the CAA will confirm, based on some basic indicators given in the first step by the captive, if the change is major and should be officially notified to the CAA with a complete file. If we don’t consider the change to be major, it might be for different reasons, such as the magnitude of the new covers seen in comparison with the existing activities, then we won’t enter into the second step. Another form currently being developed concerns the notification of change of shareholder. The form will allow us to clearly set our expectations and what we require in the submission, and will facilitate the dialogue between the captive owners and the captive managers and the CAA. Going forward, we want these notifications to be digitally made to the CAA and under a specified format, which will improve the speed of treatment of these files for both parties.
CR: Is the Commissariat considering introducing captive cell legislation?
VS: The CAA is not opposed to the introduction of new types of vehicles, provided there is a real interest for it. So far, the interest of the market does not seem to be there. If the interest materialises, then we will start to work together with the interested parties and some stakeholders to build proposals for new rules.
CR: What are the advantages of Solvency II as a reporting regime for captives and what are its limitations?
VS: The fact that captives are subject to Solvency II is a recognition that they are professional insurance or reinsurance companies that operate in a regulated environment, with a proper governance and risk-management framework. In addition, their ultimate beneficiary owner as well as their activities have to be declared to the national supervisory authority, which is the guarantee that their operations are transparent and controlled. Also, the members of their board, their general managers and those playing a key role in the second and third line of defence in the control framework are reviewed by the national supervisory authorities under the aspects of fitness and property. Being regulated as a professional insurance or reinsurance company gives to captive a certain legitimacy and is a recognition of the importance of the support they offer to the groups they belong to.
CR: What impact has the new captive legislation in France had on Luxembourg?
VS: So far, no major impact has been observed by the CAA.
CR: What are your expectations for the Luxembourg captive industry going forward?
VS: The system has proven to be efficient and supportive of the activities of the group the captive belongs to. In case of a stress event in the captive, the equalisation provision is used to absorb it, as statistics presented in our annual report demonstrate it. We maintain an open dialogue with the professional association of captive managers in Luxembourg that brings ‘hot’ topics to our attention and, with this, we remain up to date regarding the latest developments in the captive industry. Our expectation is to maintain the system built so far, with a strong regulatory environment embedding the captive managers but with a clear understanding of the risks the captive is exposed to and an application of proportionality where it matters and makes sense.
CR: Can you give us some details on the general profile of all Luxembourg captives – such as lines, industry, parent location, etc?
VS: It is complicated to derive the typical profile; the industry type is very diverse (construction, logistics, transport, equipment, food and so on) but clearly the vast majority belong to European groups having multinational activities.