For multinational companies with insurable risk throughout Europe, a domicile such as Gibraltar is often a natural choice for a captive. Gibraltar is a full member of the EU and as such, Gibraltar insurers benefit from access to the European market under freedom of services legislation. In practice, this means that any Gibraltar insurer—whether captive or open-market—can write insurance for policyholders in any European economic area (EEA) state. As a result of this, Gibraltar’s insurance industry has grown significantly over the past 20 years and is increasingly seen as the gateway to Europe...
For multinational companies with insurable risk throughout Europe, a domicile such as Gibraltar is often a natural choice for a captive. Gibraltar is a full member of the EU and as such, Gibraltar insurers benefit from access to the European market under freedom of services legislation. In practice, this means that any Gibraltar insurer—whether captive or open-market—can write insurance for policyholders in any European economic area (EEA) state. As a result of this, Gibraltar’s insurance industry has grown significantly over the past 20 years and is increasingly seen as the gateway to Europe.
Needless to say, Gibraltar must compete with other major domiciles for a share of the captive market, however, the competitive landscape is varied and uneven. Malta, Dublin and Luxembourg all provide some degree of competition and each domicile tends to appeal to particular types of business. Gibraltar is unique in that it scores highly in every category. It has an accessible regulator, a benign tax regime, a legal system based on English law and a developed infrastructure. Gibraltar also offers a number of additional practical benefits too—for example, a predominantly bilingual workforce (English and Spanish), which has particular appeal to North and South American organisations.
Establishing a captive in Gibraltar
Establishing a captive insurer in Gibraltar is a relatively pain-free process, certainly compared to the larger European jurisdictions. Most parent companies will appoint a captive manager on the ground in Gibraltar. The captive manager will typically project manage the application process in order to get the captive licensed and established. The application process usually takes around four months, which compares well to other reputable onshore EU domiciles. Once the captive is licensed in Gibraltar, the insurance manager will submit a request to passport under freedom of services to the Gibraltar regulator, which in turn, informs their counterpart in the destination EU state. It’s very straightforward and in our experience, the system works very well.
When passporting into other European states, it is doubly important for the captive board to remember its obligations for retaining ‘mind and management’ in Gibraltar, particularly if the captive is righting third party (eg, customer) business via another subsidiary. This means, among other things, that the captive must ensure strategic control remains in Gibraltar and that the captive is not used simply as a pot of capital. The captive manager will usually provide advice and assistance in ensuring that the company satisfies these obligations.
In addition, insurance premium tax rates differ throughout Europe and the captive or its manager must ensure these are remitted to the relevant authorities. There are a number of European countries with notoriously convoluted insurance premium tax regimes and advice should be sought where appropriate.
Non-EU reinsurers and fronting
Of course, with EU membership comes EU minimum solvency requirements. Undeniably, this can put off a number of potential captive owners for whom capital is tight, but for many multinational captive owners it is a price worth paying for the flexibility and access that EU passporting rights provide.
There are other options, however, and a particularly capital-efficient way to access EU passporting is with a fronting insurer. Typically, this involves establishing a non-EU reinsurance captive and using a fronting insurer in an EU jurisdiction through which to access other EU states. In a recent example, a UK parent company established and capitalised a Barbados reinsurance company to underwrite the risks emanating from its subsidiaries in the UK, France and Germany. The reinsurance captive provides 100-percent quota share reinsurance to a Gibraltar fronting insurer, which ultimately issues the policies. In return, the Gibraltar fronting insurer receives a ‘fronting fee’ to compensate it for capital usage, credit risk and administration. There are a number of benefits to this approach, in particular, its capital efficiency.
By utilising the fronting model, the parent company has the freedom to establish a captive, albeit a reinsurance captive, in a wider variety of domiciles such as Guernsey or Barbados. In these jurisdictions, capital requirements are generally lower and set-up times considerably shorter. By way of comparison, the minimum solvency requirement in Guernsey is £100,000, whereas in European states the regulator will usually expect in excess of £3-4 million. The fronting vehicle can be either a standalone company or a ‘cell’ within a protected cell company (PCC) or incorporated cell company (PCC). A PCC is one legal entity divided into the ‘core’ and multiple ‘cells’. The assets and liabilities of each cell are legally segregated from those of the core and all other cells (a cell within an ICC works in a very similar way, however, each cell has a distinct corporate entity). In other words, for the purposes of facilitating a reinsurance transaction, a cell can perform a very similar function to a standalone company.
Indeed, cells can be even more cost effective and capital efficient than a standalone reinsurer. For example, the core of the PCC will already have an insurance licence and will already meet the regulatory capital requirement. It will also have in place arrangements for the overall management of the entity, leaving the cell to get on with transacting reinsurance.
Often, the challenge for many captive reinsurers, whether cell or otherwise, is finding a suitable fronting partner. A great deal depends on the requirements of the parent; whether it requires a rated insurer, for example.
For most pure captive arrangements, however, a rating is not required though the financial robustness of the fronting partner remains important.
The insurer must also be willing to accept the captive as a reinsurance counterparty—and at the right price.
It is important, therefore, to highlight the financial strength of the captive, its own reinsurance programme and its parent. Often, the fronting insurer will insist on a number of contractually clauses in the policy documents and reinsurance agreements to mitigate its credit risk, though this depends largely on the perceived risk profile of the captive. A more burdensome risk mitigation measure is the requirement for a letter of credit (LOC), which can be expensive and often inefficient.
Fronting fees can vary from around 2.5 percent for large or low-risk programmes to around 10 percent for smaller or high-risk programmes.
Gibraltar is an excellent place to find a suitable fronting insurer. Gibraltar, as mentioned above, is an EU domicile and all insurers have European passporting rights. There are a number of insurers in the market with the appetite and capability to front European captive programmes. Set-up times can be very quick, particularly if the fronting insurer is already licensed in the relevant classes and passported into the relevant territories. If not, the process can take a little longer.
The implications of Solvency II
The fronting model is due to be tested as regulators in Gibraltar and elsewhere begin rolling out the final elements of Solvency II ahead of the official implementation date in 2016. Though the fundamentals of the model will not necessarily change, the costs for reinsurance captives will inevitably increase. Non-EU reinsurance captives will be faced with increasing demands for LOCs and parent company guarantees, as well as cut-through clauses, ensuring the fronting insurer has recourse to the captive’s own reinsurers. Of course, in a Solvency II world, there are a number of ways for the non-EU captive to appear more attractive to potential EU fronting partners, by for example, obtaining a rating. Ultimately, despite the absolute increase in costs, any changes in the relative costs of the reinsurer-fronting model versus the standalone EU captive will be less significant.
Gibraltar is right to claim the title of ‘gateway to Europe’. For standalone captives or cell captives, it provides the best of both worlds. It has an accessible and knowledgeable regulator, EU membership, cultural and legal familiarity, a bilingual workforce, and a developed infrastructure. Equally, for non-EU captives, Gibraltar offers an excellent market in which to find high quality fronting insurers with capacity and appetite for new business. In any case, the captive reinsurer and fronting insurer model can be a particularly capital-efficient structure.
