The challenges for captives across Europe are increasing following the Covid pandemic, according to tax and regulatory compliance firm Sovos.
The firm new guide to insurance premium tax compliance, notes that while the continent is the third largest captive home in the world, the number of captives in Europe has “stagnated” in recent years.
“There are 900 active captives, but most of them are located in less than ten territories,” the report notes, with Guernsey and the Isle of Man being the most popular, followed by Luxembourg.
As the industry has overcome previous tests such as Solvency II, Sovis notes that it faces growing challenges with the directive currently under review, and the OECD’s base erosion regime. Taxation and profit shifting is increasing regulation, especially with country-by-country reporting requirements.
The biggest immediate threat, however, is the pandemic and its aftermath, according to Sovos.
“With the shutdown of the global economy, many industries have been affected including the automotive, aviation, retail and tourism industries. Some businesses have been hit harder than others. Some could even close, which could threaten the existence of some captives by a domino effect, ”says the guide.
A key question will be whether captives could play a role in covering pandemic risks in the future.
“While some argue that captive insurance is a good tool to cover the risks of business interruption and in practice already cover the risks of pandemic and business disruption not resulting from property damage, d ‘others emphasize the scale of the current pandemic and the fact that it affects virtually every country in the world, “he said.”[If] all countries covered by a captive program are affected, it becomes more complicated for a captive (or any other insurance company) to compensate all of its local policyholders.
Sovos said public-private partnership could be the answer.
“The solution could lie in mixed insurance and reinsurance schemes such as the Pandemic Risk Insurance Act presented to the US Congress which involves all stakeholders: insurance companies, captives but also states and local governments,” he concludes.