Future or existing captive owners have their own thoughts on captive domiciles. Selection of country of establishment is often difficult to make as pros and cons may compensate. That is why, in the end, either cultural proximity or service providers lobbying attracts the final decision.
Future or existing captive owners have their own thoughts on captive domiciles. Selection of country of establishment is often difficult to make as pros and cons may compensate. That is why, in the end, either cultural proximity or service providers lobbying attracts the final decision.
Uncertainties around Solvency II—both from an enforcement date perspective and extent of application to captive companies—have placed the European economic area domiciles on hold in the minds of captive owners and new captive setup project managers. While the Solvency II ‘excuse’ has been referred to for awhile, the probable target for application of the directive is now set for 2016 with a certainty for incremental implementation actions in 2014 and 2015. In the meantime, some offshore domiciles announced that they would not adopt Solvency II equivalent regulation.
In 2013, the company offshoring topic raised in temperature. As a result, UK-preferred offshore domiciles (Guernsey and the Isle of Man) were subject to strong comments from UK politicians. Simultaneously, new rules for controlled foreign companies were established that potentially result in a new competitive advantage for onshore domiciles (Luxembourg, Dublin and Malta).
This is where Luxembourg—the EU leader for onshore captive companies—is back on the map of the new captive setup projects. Requests for consultation on relocation have increased recently. Most questions relate to existing regulation, development trends or taxation framework. Along with these requests and in the context of new captives setups or acquisitions, accounting and regulatory consulting professionals had to clarify frequent misunderstanding around the rationale and mechanics of the equalisation provision.
Luxembourg’s insurance regulator and Solvency II
From 2009, the Commissariat aux Assurances (CAA, the Luxembourg insurance and reinsurance sector regulator) has been following insurance and reinsurance entities closely in the early stages of Solvency II implementation. The CAA first ensured significant involvement of the companies in a series of quantitative impact studies. Afterwards, quantitative information has been progressively integrated into annual regulatory reporting for all insurance and reinsurance companies or captives. The present version of the regulatory reporting comprise the following Solvency II quantitative elements: best estimate of technical provisions, balance sheet prepared under the economic value principle, basic solvency capital requirement under the standard model, and capital requirement calculation including risk margin and eligible elements classification.
For regulatory returns filed in 2013, the CAA introduced a specific report on governance. Actually, this first version is an assessment of the sector’s readiness for Pillar II requirements. As declared by the CAA, individual debriefs with insurance and reinsurance entities will be conducted during the second half of 2013. This announces quite transparently a progressive set of actions on internal control, governance and risk management.
Foreseen guidance by the regulator on Pillar II will not be as precise as for Pillar I. Nevertheless, each insurance and reinsurance company will be monitored by the CAA on the progress made and milestones reached for a smooth transition to Solvency II application.
On the Pillar II area, most captives are closely accompanied by Luxembourg-based captive management companies and external advisers in a full Pillar II package project management strategy.
Solvency II transposition
On 25 July 2012, the draft of the new law on the insurance sector was submitted to Luxembourg Parliament. This new law is described as a new foundation for the insurance business in Luxembourg and will replace the law of 6 December 1991 as amended.
This draft law is the transposition of the Solvency II Directive into the Luxembourg legal framework.
A portion of the full text has been enacted already, on 12 July 2013, with the creation of the insurance sector professional (ISP) status. This early adoption is intended to permit these ISPs to obtain their licences and begin offering their services. Some of the ISP professions were already active in the Luxembourg market (brokers, actuaries, captive managers), but some intend to propose Solvency II control/risk management framework-related services, which captive owners may consider useful for Pillar II and Pillar III implementation.
The accounting law will also be amended to incorporate the equalisation provision as an accounting principle (rather than a regulatory principle). Such an update of the law turns to a certainty that the equalisation provision will be maintained in Luxembourg.
This significant change will succeed an (almost unnoticed) amendment to the existing regulation on the equalisation provision that occurred in 2013. The basics and condition for the impact of a change in business plan, or most importantly change in shareholding (through the acquisition of a captive), were enshrined in the text.
As a result, the common rule is now that a captive will not automatically benefit from the prior multiples. Consequently, due diligence on captives being bought must include a more precise calibration of the target captive to acquire.
This will be a new but not unrealistic challenge for experienced risk managers, as long as they seek expertise in the Luxembourg legal and regulatory framework for reinsurance.
