Reinsurance by captives is often perceived purely as a tax strategy. Is this assessment justified?
No. In addition, in the countries where we operate, namely Luxembourg, Switzerland, and Malta, the authorities do not see captives as fiscal optimisation solutions. It is a genuine risk management tool that allows the identification of the reserve that we will allocate to pay a claim, and with beneficial fiscal conditions. If you put a million aside over five years and then you suffer a loss, you can spend that million, whereas if you put the same amount in your accounts, with a 20% tax, you will only retain 80%. It’s true that there is a fiscal advantage, but it's related to technical insurance provision rules. It is also true that the subject of captives is also a bit of a secret, because it is a strategic tool that aims to settle claims and to protect the company's balance sheet. A company that has adopted such a vehicle does not necessarily want to communicate the weapons it uses to its competitors.
What are the benefits of the establishment of a captive?
The first advantage is to appear as a partner to the insurer. This allows you to work with this insurer over the long term, while influencing rates. But when you have a captive, the discussion you have with your insurer is not limited to prices, it also guarantees the option of choosing a partner based on the quality of its services. Another advantage is that you will benefit from risk management performance to make provisions and consequently finance the risk that you could not pay yourself before. Finally, the establishment of a captive also allows people in charge of risk management to have another counterweight within the company. Having a captive represents a real strategic interest. In some cases, it can even sustain the company's commercial development. For one of our clients operating in the retail sector, we devised a series of guarantees to sell to their customers. While it started as a risk management tool, it has now become one of their sales driving products.
And what are the disadvantages? The fact of having to immobilise funds?
No, because you will be able to partially manage these funds in the form of intra-group loans, there is some flexibility on this. So I do not know if there really are disadvantages, but it’s true that this is another form of risk management. This means changing habits. There is also the aspect related to the image of the captive, which is associated with financial secrets and tax havens. Take a French company like EDF, which had to create a captive, as did all of its competitors active in the nuclear sector, simply because that capability does not exist on the market. This caused a scandal when the media talked about its captive in Luxembourg, while in reality it was part of a sound risk management strategy.
What is the state of the captives market right now? How will it grow?
Between 2008 and 2012, we saw that the captives were growing at a slower pace, because with the financial crisis, parent companies needed more cash. But now the interest in them is making a comeback. For two years, we have seen three captives created per year, whereas before we had only one. My colleagues have seen nearly the same rate. That’s a lot, because in the world of insurance, we play a role that’s a bit similar to an artisan. So there is a real recovery in the creation of uninsured or uninsurable risks, with smaller companies as well.