AMRAE attempting to give legitimacy to captives in France

PARIS—Risk managers in France are being encouraged by their representative association to consider greater use of captive insurance as a risk management tool.

And regulatory and fiscal changes in France and the European Union have given the alternative risk financing mechanisms greater legitimacy, they say.

In the last 25 years, insurance and reinsurance captives have become the world's top alternative risk-financing tool, rising fivefold in number to 5,000 in 2006, and used by at least 33 of the 40 largest companies on Euronext Paris, the French stock exchange, according to experts.

However, the number of French companies with captives is unknown. Captives "have largely been a taboo here, so much so that companies have even been reluctant to talk about them if they do have one," said Michel Yarhi, president of the Association pour le Management des Risques et des Assurances de l'Entreprise.

Paris-based AMRAE, France's main association for risk managers, has published a new practical guide to help members sell their bosses on the merits of creating captive insurance or reinsurance units. In its press conference in mid-May, it also discussed plans for the rest of 2007, including electing a new president in July.

Mr. Yarhi said AMRAE's "Guide pratique des captives d'assurance et de reassurance" was written by risk managers for risk managers, and offers about 20 arguments for creating a captive.

Among reasons for setting up a captive, the association contends, are that they can help a company escape the price cycle for insurance and reinsurance premiums, reduce taxes, and give more control over risks as well as afford direct access to important reinsurance markets, such as GAREAT--the Gestion de l'Assurance et de la Reassurance des Risques d'Attentats et Actes de Terrorisme, France's pool for coinsurance and reinsurance of terrorism risks.

"For companies that are interested, now is the time to create a captive. Even in a soft market, a captive has its uses, and costs can only go up from here," said Mr. Yarhi, who is also group insurance manager at Paris-based Societe Generale.

Black mark

"For about 10 years, tax authorities considered captives the foreign subsidiaries of French companies, deliberately designed to avoid French taxes. They wanted to tax them in France anyway, which was effectively double taxation," said Yvon Colleu, a manager at EDF Assurances, the insurance subsidiary of Electricite de France, and a member of AMRAE's administrative council.

"Some companies even closed their captives because of this uncertainty," said François Filhol, risk manager for Paris-based Lafarge S.A., and head of AMRAE's committee on alternative risk financing.

Mr. Yarhi said that Europe's recent regulatory changes, in particular the new European Union reinsurance directive, as well as changes to market organization, have given captives new legitimacy.

According to the AMRAE guide, various regulatory and legislative changes such as article 209B of the updated Code General des Impôts, and the Financial Security Law (2003), inspired by the United States' Sarbanes-Oxley Act of 2002, helped assuage tax officials' suspicions on captives by making the legitimacy of captives more evident.

"Today, although there is still a certain discretion on the subject, captives are transparent financial and technical tools because they are more and more obligated to report (to authorities) and are subject, as are all companies, especially listed ones, to internal and external controls such as Sarbanes-Oxley in the United States and La Loi de Securite Financiere--LSF--in France," the guide says. "Furthermore, as with all insurance and reinsurance companies, (captives) are regulated by insurance authorities."

Still, Mr. Filhol said: "Captives remain very poorly understood by enterprises and even by some insurers. The subject comes up often at AMRAE. Many enterprises are still studying the opportunity to create a captive or to complete their reinsurance coverage with an insurance captive."

One problem is that company directors remain reluctant to allocate funds to something that has nothing to do with the company's main activity, according to Mr. Yarhi.

"To convince them, the risk manager has to know how to integrate the creation of a captive into the enterprise's strategy and build an argument that will allow top management to evaluate the advantages and disadvantages," the AMRAE guide said.

Mr. Yarhi said the new guide is part of AMRAE's drive to communicate more about its work, especially in its special committees. He said AMRAE will publish another guide in September or October, on risk mapping.