Is Luxembourg still in a position to remain the preferred EU jurisdiction for Reinsurance Captives?

This position is due to the attractive regime that has been put in place in Luxembourg, the flexible and pragmatic approach of the Luxembourg insurance regulator and the highly qualified personnel to lead and manage captives.

Particularly at the time Brexit emerged in the United Kingdom, the Luxembourg insurance regulator (the “Commissariat aux Assurances”, or “CAA”) positioned itself as a strong and “open for business” jurisdiction in which to establish a European Union’s based domicile or to transfer portfolios from UK-based companies in the wake of Brexit.

Luxembourg’s insurance market has remained resilient despite successive shocks and, according to the latest CAA’s annual report, a significant increase in employment has specifically been recorded in the reinsurance sector, with growth of 9.35% for the year 2022. This trend, should of, course continue over time to ensure that Luxembourg is well equipped in terms of human resources and governance.

As mentioned above, all regions of the world have been affected by several types of geopolitical circumstances and the effect has been an upward adjustment in reinsurance prices at renewal. These conditions have led to an increased interest in reinsurance captives. For example, industrial groups have seen an interest in having this type of vehicle within their group to reduce the costs of reinsuring risks, albeit to have maintained part of these risks if not all within the group. Further, it is difficult to reinsure certain special risks such as cyber-risks, for which there is a limited appetite from reinsurers and/or the prices offered are not attractive to the insureds. Luxembourg has seized the opportunity to continue to highlight its advantages in this sector, as it is the case for publications made by Luxembourg for Finance.

As touched upon already, there is also a current trend to exclude or refuse to insure certain risks, such as natural catastrophes or cyber risks, or to increase premiums or reduce capacity, which makes these captive solutions even more attractive – not surprisingly, Luxembourg reinsurance captives exist in almost all sectors.

We believe that Luxembourg will remain a good location to establish reinsurance captives. Given the number of captives authorized in Luxembourg, the CAA is a regulator that is very familiar with the concept, the applicable rules and the flexibility offered.

Whilst the set of definitions in the Luxembourg law in relation to the insurance sector is clear and well established, the CAA knows how to deal with captive reinsurance applications, including in light of the Solvency II requirements (e.g., as regards the provision for claims outstanding and/or the equalization reserve); the technical provisions for captive reinsurance undertakings are well regulated. In particular, the CAA applies the principle of proportionality in its substance on captive reinsurance undertakings, which is very helpful.

Certain jurisdictions have recently adopted reforms to make their reinsurance captive’s regime more competitive to and re-attract reinsurance captives on their territory. Luxembourg remains, however, confident in its own competitiveness and indeed, in its latest annual report, the CAA highlighted that reinsurance premium income for 2022 is at record levels. The CAA also mentioned that the interest in reinsurance captives has existed for decades and is ongoing, and it does not see these new foreign regulations as a threat to Luxembourg’s competitiveness.

However, the review of Solvency II’s framework and the possible introduction of new substance requirements is a potential obstacle to Luxembourg’s success in this area, but this remains a hypothetical obstacle as the CAA is likely to remain a flexible and pragmatic regulator. It is also important for Luxembourg’s success that the CAA remains a business-friendly regulator with which market players can interact and share market views – which the CAA will then pass on to international actors in the insurance field, such as the EIOPA, the European Commission, or more generally, the OECD.

In conclusion, and although we cannot ignore an increased competition and international initiatives to reform the existing captive reinsurance regime, Luxembourg still has convincing arguments that give it a competitive advantage over its neighbors. Moreover, it has a solid reputation in this field, which will help it to remain the jurisdiction of choice for captive reinsurance undertakings.

Authored by Pierre Reuter, Simon Recher, and Mathilde Soetens.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}