AGEFI Luxembourg - mai 2025

AGEFI Luxembourg 18 Mai 2025 Banques / Assurances O ver the past fewdecades, Luxembourg has emerged as one of Europe’s leading hubs for reinsurance captives.Acaptive is an insurance or a reinsurance com- pany established as a subsidiary of a non-insurance parent company, primarily to underwrite and retain the risks of its parent. Captives offer risk managers of largecorporatesacentralizedand strategic tool tomanage local risks withininternationalinsurancepro- grams. This setup allows compa- nies to implement andmaintainan optimal risk financing strategy and enables more effective oversight, control,andcoordinationofriskman- agement activities across jurisdictions. Byassum- ingabroadrangeofrisks,captivesfacilitatetheimple- mentation of targeted loss prevention and risk miti- gationmeasures, thereby improvingboth the quality and efficiency of riskfinancing. Loss prevention measures take on strategic impor- tance at the local level, as the captive, functioning as a self-financing instrument, plays a key role in absorb- ing and financing losses. This internal alignment of interests strengthens risk awareness and incentivizes sound riskmanagement practices across the group. One of the key advantages of owning a captive is direct access to the reinsurance market, which allows the parent company to secure additional insurance capacitywhenneeded. This “valve effect” not onlyenhancesflexibilitybut alsoopens thedoor to reinsurance arbitrage. Many riskmanagers capi- talize on this by optimizing pricing, terms, and capacity, effectively decoupling their risk transfer strategies fromthe constraints of the traditional pri- mary insurancemarket. Inpractice,captiveownersoftenstartbyunderwriting short-tail risks, such as property insurance. Most of the time the captivewrites afirst layer inexcess of the local deductibles, the rest of the capacity being pro- videdbytheinsurancemarket.Forexample,acaptive mightassumethefirstEUR5millioncoverageunder an international insurance program, along with the correspondingclaimsvolume,uptoanannualaggre- gate limit agreed with the primary insurer (fronter), let’s say EUR 10 million. This limit is typically set basedonacombinationofbusinessstrategy,actuarial modelling, and regulatory considerations, including Solvency II requirements. If a single claimexceeds EUR 5million, or if the total annualclaimssurpasstheagreedEUR10millioncap, the fronter assumes responsibility for the exceeding amount. Determining appropriate per-occurrence andannualaggregatelimitsdemandsrobustactuarial analysis to ensure the risk-sharing structure remains sustainable, efficient, and aligned with the captive’s financial capacity. Inpractice,captiveownersoftenengageseparatefron- ters for each line of business. For instance, in the case ofproperty,marine,andliability,eachfrontertypically provides its own tailored risk transfer structure with defined per-occurrence and annual aggregate limits reinsured to the captive. It is uncommon for a primary insurer to include the cededexposuresofcompetinginsurerswithinitsown reinsurance cession to the captive. This is largely due to significant differences in underwriting appetite, pricingmethodology, andclaimsmanagement prac- tices across insurers, which make consolidated ces- sions operationally and commercially complex. The captiveownermust decidehowtobest structure risk limitation in the sense of balance sheet and sol- vencyprotectionforitscaptive:eitherbymaintaining separatemono-linerisklimitswithindividualcedants or by engaging with a contractual partner who con- solidates all lines of business into a single multi-line agreement. Most reinsurers with direct access to the corporatemarket specialize inoffering such compre- hensive balance sheet protection solutions. Advantages of amulti-line treaty offer compared to individual mono-line covers for a captive owner Assuming a captive’s balance sheet holds sufficient risk capital to absorb potential losses, the amount of capital requireddepends on thevolatilityandunpre- dictabilityoftherisksinvolved:Thegreatertheuncer- tainty, the more capital is needed. One of the most effective ways to reduce this uncertainty is through diversification.Byassumingrisksfrommultiplelines of business into the captive, the overall volatility pro- file becomes more stable, reducing capital require- ments andultimately lowering related costs. There are two primary ways to achieve diversifi- cation: 1. Multi-line approach: By combining various types ofriskswithdifferentvolatilitylevelswithinthesame portfolio,theoverallriskexposurebecomesmorebal- anced, 2. Multi-year approach: By spreading the financing of risks over several years, the impact of losses is smoothedout,reducingthelikelihoodofseverefinan- cial strain in any single year and providing greater cost stability andplanning certainty. As a result, a company’s riskfinancingstrategy, par- ticularlywhenusingacaptive,ismosteffectivewhen it includes awide rangeof linesof busi- ness and takes a longer term under- writing perspective. This approach enables the captive to better absorb volatility, optimize capital usage, and reduce overall costs. Assessing the adequacy of a multi-line andmulti-year captive protection For experienced, for- ward-looking captive owners, a Multiline- Multiyear (MLMY) strat- egy offers significant advantages. Rather than setting separate annual lim- its for each line of business, theyshouldconsidercombining multiple lines and spreading risk over several years. This holistic approach provides stronger financial protection and enhances the sta- bility of the captive’s balance sheet. Françoise Carli, former Head of Group Risk ManagementatSanofiandindependentboardmem- ber of several captives, explains: “Diversification is key in the captive set upas it is thefirst andeasypro- tection for an intensity claim. No risk manager will accept to ruin its captive set up by having a mono line captive and be hit by amajor claim. This is why having multiple lines in your captive can decrease significantly volatility and consequently lower your neededcapital.Althoughitisdifficulttocreateacap- tive, from the first year on, with multiple lines, this maybeachievedover2or3yearswithanintegration strategy line after line. Considering this statement, it also works for captive protection, especially if you haveamaturecaptive,withmultipleclaims,multiple linesofbusinesses,andmultipleclaimspaymentpat- terns. Monoline protection will not be efficient enoughonce the captivewill reachan important size and a high volatility exposure.” Step 1: Can we improve the retention and partici- pation structure? -Are thereopportunities tooptimize the level of risk the captive retains or assumes? -Wouldexpanding the captive’s involvement across additional lines of business (LoBs) help diversify its portfolio and reduce volatility? - Can the total cost of risk be lowered by increasing the captive’s participation in certain LoBs? For example, if the captive’s share in Property DamageandBusiness Interruption (PDBI) increases from EUR 10 million to EUR 20 million, and the insurance market offers discounts for higher reten- tions, would the resulting savings outweigh the additional exposure? In other words, is the cost of retaining risk within the captive lower than paying themarket premium for that layer? - Shouldannual limitsbeapplied toeachLoB topro- tect the captive’s balance sheet, or would a com- bined,Multiline-Multiyear (MLMY) StopLoss rein- surance bemore efficient? This approach could allow full participation in each LoB without separate annual limits, while using reinsurance to avoid overlapping or duplicative coverage. Step 2: What level of protection does the captive need? - What is the appropriate level of protection for the captive’s balance sheet? Specifically, what should be theattachmentpointandcoveragecapacityofacross- line StopLoss reinsurance? -At which percentile should the attachment point be set? This defines howmuch loss the captive absorbs before reinsurance kicks in. - What is the required risk transfer capacity? This refers to themaximumcoverage the StopLoss struc- turemayprovide across all lines. - How much risk is the captive willing and able to retain?ThisistypicallydefinedbytheAnnualorTerm AggregateDeductible(AAD/TAD),whichshouldbe alignedwiththecaptive’ssolvencycapacity.Thehigh- er the Solvency Ratio, the more risk the captive can retain. - Shouldall lines of business contribute equally to the deductible and be covered under the Stop Loss? Or should it be weighted based on volatility or strategic importance? - What should be the duration of the Multiline- Multiyear (MLMY) balance sheet protection, three years or five years?” AndrewBradley,formerHeadofGroupRiskServices at Nestlé and independent captive boardmember of several captives, emphasizes: “The strategic choice between mono-line balance sheet protection and multi-line reinsurance is a critical decision for captive ownersmanagingmultiplelinesofbusiness.Theben- efits of diversification are quantifiable and typically lead to a reduction in the overall cost of risk capital. Furthermore, adopting a multi-line, multi-year approach to captive balance sheet protection offers risk managers enhanced stability and planning cer- tainty, especially in the face of evolving and unpre- dictable insurancemarkets.” Conclusion In recent years, European captive owners have sig- nificantlyexpandedtheircaptiveactivitiesinresponse to a hardening insurance market. New lines of busi- ness, such as cyber insurance, are increasingly being considered for captive reinsurance, alongside a notableriseinthelevelofretentionintraditionalinsur- ance programs. At the same time, the growing frequency of natural catastrophes in Europe, widely attributed to climate change, has drawn greater attention from the risk managementcommunity.Ifthistrendcontinues,risk managers will need to reassess how they structure risk transfer through their captives. As a result, ensuring effective protection of the cap- tive’s balance sheet is becoming a key priority. One promising solution is the use of multi-line &multi- year reinsurancesolutions ,whichofferbroader cov- erage andgreater flexibility. Don’tmisstheopportunitytoanalysethistailor-made balance sheet protection, which is designed to help you toprotect your captive’s assets. SerenaCADUFF, DivisionalOperatingManagerARTatSwissReCorporateSolutions RosyLAURENT, COOof2RSLuxembourg,LicensedManager&Actuary Why multi-line balance sheet protection is of growing interest to captive owners Par Philippe LEDENT, Senior Economist, ING Belgique-Luxembourg L esmarchés financiers se sont un peu calmés ces dernières se- maines, encouragés par la pers- pective d’accords commerciaux.Mais ne nous y trompons pas, nous sommes loind’être revenus dans une situationnor- male. Le contexte actuel donne l’impressionque lemonde est comme un animal pris dans la lu- mière des phares, ne sa- chant pas quoi faire et terrifié par ce qui pourrait le frapper. Se préparer à d’autres chocs économiques “ Le calme après la tempête ”... N’y a-t-il, a priori, pas meilleure expression pour décrire le début dumois de mai sur les marchés financiers, après la forte hausse des tarifs douaniers en avril, suivie par des turbulences sur les marchés et même des doutes sur l’indépendance de la Fed. D’aucuns pourraient être tentés de penser que les défis posés à l’économie mondiale se sont pour l’essentiel évaporés. D’ailleurs, il ne faudrait pas être surpris que la plupart des institutions révisent leurs prévisions de crois- sance à la hausse dans les prochaines semaines, après les avoir drasti- quement révisées à la baisse début avril. Mais attention, n’oublions pasqu’endépitdesallers- retours sur les droits de douane, leur niveau ef- fectivementimposésreste nettement plus élevé qu’audébut de l’année. Dèslors,lescénarioleplusvraisemblableresteque les nouvelles macroéconomiques deviennent plus négatives, lorsque l’impact direct de la hausse des droitsdedouane semanifesterapleinement. Bref, les tensions commerciales actuelles sont et resteront un choc de l’offre aux États-Unis et un choc de la de- mande dans la zone euro. Par ailleurs, l’économie mondiale est loin d’être à l’abri de nouvelles annonces excessives en matière de politique économique américaine. De plus, la guerre enUkraine s’éternise et l’incertitude reste éle- vée, notamment en ce qui concerne l’État dedroit et la stabilitédes institutionspubliques auxÉtats-Unis. En d’autres termes, l’économie mondiale se trouve peut-être plus dans « l’œil du cyclone » (cette période d’accalmie apparente qui caractérise le centre d’un cyclone) plutôt que dans le « calme après la tempête ». Le pétrole est un facteur atténuant Mais ne noircissons pas trop le tableau. La chute brutale des prix dupétrole est un autre choc écono- mique mondial, mais cette fois positif, qui devrait constituer un facteur d’atténuation.Mis à part pour les pays qui en exportent, la baisse du prix du pé- trole devrait avoir un effet bénéfique sur les pers- pectives économiques. Cela ne suffira probablement pas à compenser en- tièrement la poussée inflationniste due aux droits de douane aux États-Unis, mais cela pourrait aider à compenser l’effet négatif sur la croissance de la zone euro et contribuera sans aucun doute à la ten- dance désinflationniste actuelle. Dans la zone euro et, à terme, aux États-Unis, cela pourrait bien don- ner à la BCE et à la Fed une plus grande marge de manœuvre pour réduire les taux d’intérêt. Si à court terme, la baisse des prix de l’énergie et la politiquemonétaire pourraient aumoins partielle- ment atténuer l’impact négatif attendu et l’incerti- tude liée aux droits de douane, l’évolution de la croissance à long terme sera déterminée, aumoins en partie, par l’efficacité des politiques budgétaires qui seront menées. A ce titre, il faut avouer que l’optimisme des der- niers mois est un peu retombé en Europe. On es- pérait en effet que le continent allait enfin saisir l’occasion de relever les nouveaux défis géopoli- tiques en renforçant son économie nationale, au lieu d’attendre de subir les événements. En réalité, ce que l’onobserve, c’est par exemple que certains pays européens tentent d’atteindre les ob- jectifs plus élevés en matière de dépenses de dé- fense en reclassant simplement les catégories de dépenses. C’est inquiétant. Et que dire du drame politique qui s’est joué récemment à Berlin, avec un premier affront pour Friedrich Merz avant même qu’il soit élu chancelier. Cela illustreune fois deplus que le sentiment d’urgence n’est pas encore com- pris par tout le monde. En attendant le prochain choc