AM Best said that there are challenges ahead for the industry in the form of regulation, tax rules and Brexit, but stressed that such pressures have helped increase risk management and governance within European captives.
In a new report entitled European Captives Demonstrate Enduring Appeal of Alternative Risk Transfer, AM Best said that owners of European captives continue to see value in using the risk transfer tools despite prevailing weak premium rates and widening terms and conditions in large sections of the general insurance market.
It noted that the ability to access reinsurance markets directly at a time when it offers particularly cheap capacity is one benefit of putting more risk through a captive during the soft market cycle. But it added that captives are "considered altogether more strategic risk management tools".
AM Best warned that there are challenges ahead for the European captive industry. These include the Organisation of Economic Cooperation and Development's (OECD's) action plan on base erosion and profit shifting (BEPS) aimed at tackling tax arbitrage, the need for contingency plans due to Brexit and an increasing regulatory burden, both in and outside the EU.
A recent OECD report specifically mentioned captive financial transactions as possible sources of BEPS. There is now pressure from tax authorities to require captive owners to demonstrate that their arrangements are driven by "clear non-taxation reasons", explained the OECD.
Ferma is concerned about the possible implications of this on the feasibility of some captives and has launched a campaign to sell the true benefits and value of these important risk transfer tools.
AM Best believes that some captives will come under pressure from new tax rules, but suggested those used as proper risk management tools, as opposed to simple financing vehicles, should be treated accordingly.
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