Insights from global law firm Hogan Lovells reveal that despite increased competition and international reforms, Luxembourg still has compelling advantages that give it a competitive edge in the captive reinsurance market.
Luxembourg remains the largest captive reinsurance market in the European Union, with most reinsurance companies domiciled there being captive-type, the firm said. These companies, subsidiaries within a group, often reinsure the risks of other group companies, with those risks channeled via a fronting insurer.
Many French insurance groups have chosen Luxembourg for their reinsurance captives, and post-Brexit, numerous UK-based insurance groups have relocated their domicile to Luxembourg.
Hogan Lovells said that Luxembourg's appeal stems from its attractive regulatory regime, the flexible approach of the Luxembourg insurance regulator, and the highly qualified personnel available to lead and manage captives.
At the onset of Brexit, the Luxembourg insurance regulator, the Commissariat aux Assurances (CAA), positioned Luxembourg as a strong and open-for-business jurisdiction for establishing an EU-based domicile or transferring portfolios from UK-based companies.
Despite successive shocks, Luxembourg's insurance market has remained resilient. According to the latest CAA annual report, there was a significant 9.35% increase in employment in the reinsurance sector in 2022. Hogan Lovells suggests that this trend should continue to ensure Luxembourg remains well-equipped in terms of human resources and governance.
Geopolitical circumstances have led to upward adjustments in reinsurance prices at renewal, increasing interest in reinsurance captives. Industrial groups have found reinsurance captives beneficial for reducing the costs of reinsuring risks
Certain special risks, such as cyber-risks, are difficult to reinsure due to limited appetite from reinsurers and unattractive prices for insureds. Luxembourg has capitalized on this by highlighting its advantages in this sector, as seen in publications by Luxembourg for Finance.
Hogan Lovells also highlighted a trend to exclude or refuse insurance for certain risks, such as natural catastrophes or cyber risks, or to increase premiums or reduce capacity, making captive solutions more attractive. Luxembourg reinsurance captives exist across almost all sectors.
Luxembourg is also expected to remain a good location for establishing reinsurance captives. Given the number of captives authorized in Luxembourg, the CAA is well-versed in handling captive reinsurance applications and applying the Solvency II requirements, such as provisions for claims outstanding and the equalization reserve. The CAA’s application of the principle of proportionality in its regulations for captive reinsurance undertakings is also beneficial.
Hogan Lovells noted that while certain jurisdictions have adopted reforms to make their reinsurance captive regimes more competitive, Luxembourg remains confident in its own competitiveness. The latest CAA annual report highlights that reinsurance premium income for 2022 reached record levels, with ongoing interest in reinsurance captives.
However, the review of the Solvency II framework and potential new substance requirements could pose challenges to Luxembourg’s success. Hogan Lovells suggests that the CAA is likely to remain a flexible and pragmatic regulator, crucial for Luxembourg’s continued success.
The CAA's business-friendly approach and its ability to interact with market players and international actors, such as the EIOPA, the European Commission, and the OECD, are important factors.
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