Insights from global law firm Hogan Lovells reveal that despite increased competition and international reforms, Luxembourg still has compelling advantages that give it a competitive edge in the captive reinsurance market.

Luxembourg remains the largest captive reinsurance market in the EU, with most reinsurers domiciled there being captives, the company said. These companies, which are subsidiaries of one group, often reinsure the risks of other group companies, with the risks channelled through a front insurer.

Many French insurance groups have chosen Luxembourg as the headquarters of their reinsurance companies, and after Brexit, many UK-based insurance groups have moved their headquarters to Luxembourg.

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Hogan Lovells said Luxembourg’s attractiveness stems from its attractive regulatory regime, the flexible approach of the Luxembourg Insurance Regulatory Authority, and the highly qualified staff available to lead and manage captive companies.

With Brexit on the horizon, Luxembourg’s insurance regulator, the Insurance Commission (CAA), has positioned Luxembourg as a strong and open country for businesses to set up an EU headquarters or move portfolios of UK-based companies.

Despite successive shocks, Luxembourg’s insurance market has remained resilient. According to the latest annual report from CAA, there was a significant 9.35% increase in employment in the reinsurance sector in 2022. Hogan Lovells suggests this trend will continue to ensure Luxembourg remains well-equipped in terms of human resources and governance.

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Geopolitical conditions have led to upward adjustments in reinsurance rates at renewal, which has increased interest in reinsurance companies. Industry groups have found reinsurance companies useful in reducing the cost of reinsurance risks.

Some special risks, such as cyber risks, are difficult to reinsure due to low appetite from reinsurers and unattractive prices for insureds. Luxembourg has taken advantage of this by highlighting its advantages in this sector, as illustrated in publications by Luxembourg for Finance.

Hogan Lovells also highlighted a trend of excluding or declining insurance for certain risks, such as natural catastrophes or cyber risks, or increasing premiums or reducing capacity, making captive solutions more attractive. Captive reinsurers are present in Luxembourg in almost all sectors.

Luxembourg is also expected to remain a good location for establishing captive reinsurance companies. Given the number of captive companies licensed in Luxembourg, the CAA has considerable experience in handling captive reinsurance applications and applying Solvency II requirements, such as outstanding claims provisions and equalization reserves. The CAA’s application of the proportionality principle in its captive reinsurance regulations is also beneficial.

Hogan Lovells noted that while some jurisdictions have adopted reforms to make their reinsurance systems more competitive, Luxembourg remains confident in its competitiveness. The latest CAA annual report highlights that reinsurance premium income for 2022 reached record levels, with interest in reinsurance companies continuing to grow.

However, the review of the Solvency II framework and potential new requirements could pose challenges to Luxembourg’s success. Hogan Lovells notes that the CAA is likely to remain a flexible and pragmatic regulator, which is crucial to Luxembourg’s continued success.

The CAA’s business-friendly approach and its ability to interact with market players and international stakeholders, such as the European Civil Aviation Regulatory Authority, the European Commission and the OECD, are important factors.

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