With nearly 250 approved reinsurance companies, of which the majority are captives, Luxembourg has become the largest captive reinsurance domicile in the EU and one of the most important in the world.
A captive reinsurance company belongs to an industrial, financial or commercial group and has the exclusive aim of covering those risks to which the group is exposed. Hence it is a self-insurance vehicle that falls under the prudential supervision of the Commissariat aux assurances (CAA), the Luxembourg insurance sector supervisory authority.
The advantages of creating one’s own reinsurance company depend on the specific characteristics and requirements of the business. In general, a captive should enable a group to obtain direct access to the professional reinsurance market and to develop an overall approach to the control and management of risk.
A reinsurance captive should also enable a group to cover specific risks which are difficult to insure in the direct insurance market. This can include adapting insurance contracts to specific needs, optimising risk coverage costs, recovering insurance premiums and reducing vulnerability to insurance market volatility. Luxembourg passed its first captive reinsurance law in 1984, with an amendment made in 2007 to transpose EU Directive 2005/68/CE into national law.
Luxembourg legislation requires that reinsurance companies collect adequate technical and balancing reserves, so allowing captives with less favourable risk diversification to build large technical reserves to cover these risks.