This presentation will present the unique features of a captive insurance company and what makes it an undisputed part of the risk manager toolbox. It will help you to: 1/ show the value of a captive insurance as a genuine risk management tool 2/ understand what to expect from the Solvency II revision in 2020 as regards captive insurance 3/ know more about the state of play of BEPS implementation in OECD countries

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FUTURE OF CAPTIVE INSURANCE
COMPANIES IN EUROPE
LIVE WEBINAR #3
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3. www.ferma.eu

4. www.ferma.eu
Polling question #1
Are you a captive user?
YES / NO / PLANNING TO

5. 5Sustainable city – open to the world
Why does a city have a
captive?
Försäkrings AB Göta Lejon

6. 6Sustainable city – open to the world
City of Gothenburg in brief
19
specialist
administrations
10
city district
committees
63
active
companies of which
46 wholly owned
55 000
employees of which
37 700 in the city
district committees
564 000
residents
34
billion SEK turnover
(€3,18 billion)

7. 7Sustainable city – open to the world
The City of Gothenburg’s
organisation
Committees
City district
committees
Social Services, Social Care, Local
Culture & Leisure
Leisure
Sports & Associations Committee
Park & Nature Committee
Transport
Transport Committee
Other Committees
Archive Committee
Committee for buying and
procurement
Committee for Consumers
Citizen Services
Intraservice Committee
Chief Guardian Committee
Committee for Allocation of Social
Welfare
Technical Provision
Eco-cycle & Water Committee
Environment
Environment & Climate Committee
Culture
Culture Committee
Education
Pre-school Committee
Compulsory School Committee
Education Committee Adult
Education Commitee
Land & Housing
Planning Committee
Real Estate Committee
Commercial Premises Committee

8. 8Sustainable city – open to the world
The City of Gothenburg’s
organisation
Göteborgs Stadshus AB
Regional companies
Renova AB, Gryab AB, Grefab AB
Energy
Göteborg Energi AB + 11 subsidiaries
Port
Göteborgs Hamn AB
Göteborgs Stuveri AB
Scandinavian Distripoint AB
Commercial premises
HIGAB
Älvstranden Utveckling AB
Scandinavium AB
Förvaltnings AB Göteborgslokaler
Göteborgs Stads Parkerings AB
Internal companies
Försäkrings AB Göta Lejon
Göteborgs Stads Leasing AB
Tourism, Culture,
Events
Göteborg & Co AB
Got Event AB
Liseberg AB
Göteborgs Stadsteater AB
Business
Business Region Göteborg AB
Lindholmen Science Park AB
Johanneberg Science Park AB
Sahlgrenska Science Park AB
Göteborgs Tekniska College AB
Almi Företagspartner Väst AB
Boplats Göteborg AB
Housing
Förvaltnings AB Framtiden
Bostads AB Poseidon
Familjebostäder i Göteborg
Gårdstensbostäder
Göteborgs Stads bostads AB
Göteborgs Egnahems AB
Störningsjouren i Göteborg AB
Framtiden Byggutveckling AB
Public Transport
Göteborgs Spårvägar AB
Göteborgs Spårvägar Buss AB
Göteborgs Spårvägar Trafikantservice
AB

9. 9Sustainable city – open to the world
Göta Lejon’s mission
Providing insurance
solutions, claims
management and risk
management support to the
City of Gothenburg´s
operations.

10. 10Sustainable city – open to the world
History
Many loss events at schools and preschools in the
City of Gothenburg.
1991 First insurance signed
1992 Installation of alarm systems started
at schools/preschools
1994 The reinsurance company Göta Re was started
2006 Göta Lejon started to insure vehicles and trams
2009 Fire at Torslandaskolan
2013 Insurance policy decided by the City council
2015 Göta Re was liquidated
2015 New RM programme, including
surveys and client seminars
2017 All of the city´s companies and
administrations insured by Göta Lejon

11. 11Sustainable city – open to the world
Why a captive?
• Historic reasons, it was hard to insure
schools/preschools due to many losses
• Need of loss prevention
• Contingency reserve could be established
• Direct access to the reinsurance market
• Resources for loss prevention can be
returned to administrations
• To handle complex risks and inter-
dependencies
• Enables a holistic view of insurance
solutions for the City of Gothenburg
• Other swedish captives:

12. 12Sustainable city – open to the world
Impact of Solvency II
• Increased share capital, SEK 100
Millions from owner
• The board must meet the higher
competence requirements and be fit
and proper
• Implementation of policies and guidelines
• Higher costs for control functions
• More extensive reporting
• Approximate cost: SEK 3,2 Millions per year
Applicable to public sector captives?
• No exposure to consumers and no
pensions or life insurance
• City of Gothenburg rating, AA+
• Taxation of 600 000 citizens
Is the cost of control proportional to the risk?

13. www.ferma.eu
The Multinational
Corporation’s View
ArcelorMittal

14. ArcelorMittal at a Glance
Global Steel and Mining Leader
EUROPE
Employees: 91,000
Sales: USD 40.5bn
Steel Shipments: 41MT
MINING
Employees: 28,000
Sales: USD 4.2bn
Iron Ore: 58.5MT
Coal: 5.9MT
Holding and Service
Companies + Eliminations
Employees: 1,500
Sales: - USD 5.7bn
Steel Shipments: -2.4MT
2018
Sales (USD billion) 76
Ebitda (USD billion) 10.3
Steel shipments (million tonnes) 83.8
Workforce 210,000
Footprint (countries) 60+
ACIS
Employees: 42,000
Sales: USD 8bn
Steel Shipments: 11.7MT
NAFTA
Employees: 27,000
Sales: USD 20.3bn
Steel Shipments: 22MT
SOUTH AMERICA
Employees: 20,000
Sales: USD 8.7bn
Steel Shipments: 11.5MT
14

15. www.ferma.eu
The main advantages resulting
from the use of a captive within a
global risk and insurance
management strategy can be
summarized within three main
dimensions.
(Re)insurance Basics Risk Control Finance & Strategy
About the technical elements relating to
(re)insurance covers and pricing structure
as well as to savings or improvement in
the purchase of traditional covers
Considerations about the role of a self-
financing vehicle in the enhanced
possibilities of risk management and
control improvement
Additional capabilities to optimize the
whole financial policy of a Group.
Captives:
Impact and Benefits
Why using a captive?
 Reduction or stabilization of
insurance premiums at Group
level.
 Direct access to worldwide
professional reinsurers.
 Tailor-made insurance
programs.
 Taking advantage of an
organization’s non-correlated
risks
 Solution to market
inadequacies (coverage for
non-insurable or overpriced
risks).
 Improved claims handling.
 Improved data collection, loss
control and prevention
measures.
 Consolidating international
programs in line with local
needs and risk profiles.
 Cash flow benefits and
investment income
 Cash Pooling mechanism and
use of assets
 Capture of insurance profits.
 Negotiation tool
 Insurance operations
enhancement

16. www.ferma.eu
Three Basic Rules
Frequency
Impact
Low impact Medium to high impact Catastrophe
Retention TransferRetention / Transfer
Losses
Time
Actual commercialpremium
Average premium
Ideal trend
1 Self-management of own risk profile
3 Total Cost of Risk (TCoR)
2 Budget Optimization

17. www.ferma.eu
Examples (1/3)
Central Underwriting Tool
for International Insurance
Programs
MOTHER COMPANY
Subsidiary /
Country 1
Subsidiary /
Country 2
Subsidiary /
Country 3
Subsidiary /
Country 4
Subsidiary /
Country 5
Local insurer 1 Local insurer 3Local insurer 2 Local insurer 5Local insurer 4
(RE)INSURANCE
CAPTIVE
(RE)INSURANCE MARKET
(re)insurance cash flows
(premiums and claims)
1
2
3
1
2
3
Main Objectives
 Operational efficiency
 Optimized negotiation power for the lowest
possible cost
 Standardized and best-in-class quality of cover
Individual Policies
at Entity Level
Insurance Centralization
at Group Level
External (Re)Insurance
Risk Transfer

18. www.ferma.eu
Examples (2/3)
DIC/DIL
Traditional Program
Deductible
Captive
DIC / DIL

19. www.ferma.eu
Examples (3/3)
Harmonizing Local
Deductibles within an
International Program
International Program
Deductibles
Captive
Subs. 1 Subs. 2 Subs. 3 Subs. 4 Subs. 5

20. Wrap Up
Key Insights and Takeaways

21. www.ferma.eu
Always bear
in mind!...
Insurance Vs. Financing
We do not « buy » insurance, we finance our claims
(except for CAT claims)
Premiums = Claims
Over a long period of time, claims paid by insurance companies
will be recovered through premiums (except for CAT claims)

22. www.ferma.eu
Key Focus Points Consolidation / IFRS
Frictional Costs
Risk Appetite
Cash Out Vs. Cash Exposed
Transfer Pricing, BEPS and Tax Aspects
Insurance Market Cycles
Highly Regulated Environment (e.g. Solvency II)
New Skills for Risk Managers / New Strategy?
Future Challenges

23. www.ferma.eu
Polling question #2
Does your captive benefit from proportionality
measures (reporting, governance…) put in place
by the local supervisor in relation with Solvency
II?
YES/ NO / DON’T KNOW

24. www.ferma.eu
Polling question #3
Which are the proportionality measures applied
by your local supervisor to captive insurance
companies?
1. Capital requirements / Solvency calculations simplification
2. Reporting (e.g.: frequency and size of QRT, RSR…)
3. Governance (e.g.: pragmatic approach for key functions…)
4. Others
Several possible answers

25. Future of Captives insurance
companies in Europe
Future of Captives insurance companies in Europe
EIOPA – Ana Teresa Moutinho
18 June 2019

26. 26
Future of Captives insurance
companies in Europe
Captives in Solvency II Directive
• Default: insurance or reinsurance undertakings should include
captive undertakings, except where specific provision is made for
those undertakings
• Acknowledgment: specific nature of captive undertakings
• Definition: ‘captive insurance undertaking’ means an insurance
undertaking, owned either by a financial undertaking …, the
purpose of which is to provide insurance cover exclusively for the
risks of the undertaking or undertakings to which it belongs

27. 27
Future of Captives insurance
companies in Europe
Captives in Solvency II
• Limitations and exemptions of reporting
• Simplifications TP
• MCR absolute floor
• Simplified calculation of capital requirement for:
o non-life premium and reserve risk
o interest rate risk
o spread risk on bonds and loans
o market risk concentration

28. 28
Future of Captives insurance
companies in Europe
EIOPA Supervisory Statement
• Calculation of the SCR sub-module using
inputs prudently estimated and leading to
prudent outcomes
• The result may be used for the next three
years
• Should not affect the compliance with any
risk management requirements
• Proper monitoring of any evolution of the risk
• Setting of qualitative and quantitative early
warning indicators

29. 29
COM CfA 3.15. Reporting and disclosure
EIOPA is asked to assess, taking into account stakeholders’ feedback
to the Commission public consultation on fitness check on
supervisory reporting:
• the ongoing appropriateness of the requirements related to
reporting and disclosure, in light of supervisors’ and other
stakeholders’ experience;
• whether the volume, frequency and deadlines of supervisory
reporting and public disclosure are appropriate and proportionate,
and whether the existing exemption requirements are sufficient to
ensure proportionate application to small undertakings.
Future of Captives insurance
companies in Europe

30. 30
COM CfA 3.16. Proportionality and thresholds
EIOPA is asked to assess whether proportionality in the application
of the Solvency II framework could be enhanced, and in particular in
the following areas:
• the appropriateness of the thresholds for the exclusion from the
scope of Solvency II, as defined in Article 4 of Directive
2009/138/EC;
• the possibility to waive certain requirements relating to any of
three Pillars of the framework based on size thresholds or the
nature of the undertaking or of its risks;
• rules for the simplified calculation of sub-modules that form an
immaterial part of the Solvency Capital Requirement of an
individual insurance or reinsurance undertaking.
Future of Captives insurance
companies in Europe

31. 31
The first wave of Consultation beginning-July until mid-October
and cover:
• General issues on supervisory reporting and public
disclosure;
• Individual Quantitative Reporting Templates (QRTs),
• Solvency and Financial Condition Report (SFCR); and
• Financial Stability Reporting.
Future of Captives insurance
companies in Europe

32. 32
Future of Captives insurance
companies in Europe
Supervisory Convergence
• Definition of captives business models of captives
• Compliance with the governance requirements -
application of the proportionality principle and the
use of outsourcing
• Cross-border issues
• Information on business model and related
integration in the ORSA process
• Investment policies and related asset management
strategies
• Assessment of reinsurance strategies and related
implications for risk management strategies

33. www.ferma.eu
Q&A

34. www.ferma.eu
Polling question #4
Are captives fit for acting as risk incubators and
covering new risks like climate, cyber….?
YES/ NO

35. www.ferma.eu
• Thank you for your attendance!
• To go further: a dedicated workshop “Future of the
captive model: showing value creation” will take
place at FERMA Forum in Berlin on Tuesday 19
November 2019
• Free registration for risk manager at www.ferma-
forum.eu
• Replay available soon on FERMA youtube channel
CONCLUSION

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WHEN: SEPTEMBER
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