There has been a considerable rise in the number of captives domiciled in Europe, as existing domiciles remain popular and other jurisdictions are put in place to attract fresher companies.
However, while European jurisdictions do not report captive numbers in a consistent manner, a recent analysis from AM Best suggests that more captives were licensed in 2022 than closed, and early indications show that there could be further growth in 2023.
According to Best’s analysis, Guernsey retook the top spot among European captive domiciles, adding 12 new captive licences during 2022 (three licences were surrendered). This was followed closely behind by Luxembourg and the Isle of Man.
Smaller established domiciles including Ireland and Switzerland also approved new captive licences during the year, while captive numbers in other domiciles including Sweden, Malta and Gibraltar appear to have remained broadly flat.
At the same time, some larger European countries which have traditionally not had many captives are making a push to be more attractive to captives, especially those established by domestic companies. This includes the likes of France, Italy and the UK.
Meanwhile, the hard market is still said to be providing a mixture of challenges and opportunities for captives.
Commercial insurers have continued to adjust insurance premiums upwards in 2023 to ensure that inflation is reflected in the price of cover. These adjustments have been accompanied by increases in deductibles and other programme restructuring to adjust for increased asset values.
The inflation-related price adjustments in commercial insurance in 2023 follow significant premium rate adjustments put through since 2018, when the commercial insurance market started to harden.
In addition, Best also highlighted an increase in the use of existing captives in response to the hardening market conditions, as owners are seeking optimal risk transfer solutions. Several captives have increased their participation on existing covers, as well as expanded into new lines of business as their parents have looked at increasing captive utilization.
But, while the hardening market is providing major opportunities for captives to demonstrate their value, it also presents a number of challenges too.
Many captives are highly dependent on reinsurance capacity to be able to offer the large limits required by their parent groups. The reinsurance market has trailed the commercial and specialty insurance markets in terms of price increases over recent years, but with significant catastrophe losses and inflation concerns affecting 2022, reinsurance is now clearly in a hard market, Best noted.
Best added, that captives, even those with good claims records, faced price increases for their reinsurance programmes in the 2023 renewals, and many also increased their retentions.
However, while reinsurers results have improved in H123, the rating agency expects the 2024 reinsurance renewal to remain challenging, with reinsurers allocating their capacity cautiously and seeking further positive price increases, and adjustments to programmes.
