Captive insurance company

Captive insurance company The captive insurance company and the protection of the interests of third parties Name: I.A.J. (Isaura) Noppert ANR: 69177...
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Captive insurance company The captive insurance company and the protection of the interests of third parties

Name: I.A.J. (Isaura) Noppert ANR: 691775 Faculty of law: Department of private law and the business law department Examination Committee: mr. N. (Noortje) Lavrijssen and mr. W.C.T. (Wim) Weterings

Tilburg, august 29th 2011

Table of content Chapter 1: Introduction Chapter 2: What is a captive insurance company and how similar are they to the conventional insurance company? 2.1 Insurance company 2.2 Captive insurance company 2.2.1 General perception of the captive insurance company 2.2.2 Sort of captives 2.2.2.1 Forms of captives 2.2.2.2 Domestic or offshore captive 2.2.2.3 Direct or indirect insurance 2.2.2.3.1 Direct captive 2.2.2.3.2 Reinsurance captive Chapter 3: Reasons for choosing a captive insurance company 3.1 Positive effects of using a captive 3.2 Downsides of using a captive Chapter 4: The legal rules of the Financial Supervision Act by which the insurance company and the captive are bound 4.1 License requirements for the insurance company 4.1.1 Expertise 4.1.2 Properness 4.1.3 Policy on the sound conduct of business 4.1.4 Minimum number of persons determining the day-to-day policy and the place from which they perform their activities 4.1.5 Control structure 4.1.6 Operational structure 4.1.7 Minimum number of members of the Supervisory Board 4.1.8 Legal form 4.1.9 Minimum equity capital 4.1.10 Solvency 4.1.11 Financial year 4.1.12 Composition 4.1.13 Subsection two: qualified shareholder 4.1.14 Subsection three: required information 4.1.15 Subsection four: dispensation 4.2 License requirements for the captive insurance company 4.2.1 Policy on the sound conduct of business 4.2.2 Control structure 4.2.3 Operational structure 4.2.4 Legal form 4.2.5 Solvency 4.2.6 Subsection two: qualified shareholder 4.2.7 Subsection four: dispensation 4.2.8 Chapter 3.6 Financial Supervision Act 4.3 License requirements for the reinsurance company -1-

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4.3.1 Minimum equity capital 4.3.2 Solvency 4.3.3 Composition 4.4 License requirements for the captive reinsurance company 4.4.1 Policy on the sound conduct of business 4.4.2 Operational structure 4.4.3 Legal form and Supervisory Board 4.4.4 Minimum equity capital 4.4.5 Solvency 4.4.6 Subsection two: qualified shareholder 4.4.7 Subsection four: dispensation 4.4.8 Chapter 3.6 Financial Supervision Act 4.5 Overview 4.6 Conclusion Chapter 5: The legal rules of the Dutch Civil Code related to third parties 5.1 Article 3:287 of the Dutch Civil Code 5.1.1 Applicability of article 3:287 DCC for the captive insurance company 5.2 Article 7:954 of the Dutch Civil Code: the direct action 5.2.1 Applicability of the direct action for the captive insurance company 5.3 Insurance on behalf of third parties and applicability for the captive insurance company 5.4 Conclusion Chapter 6: Overall conclusion Literature Exhibit A: Requirements for setting up a captive insurance company Exhibit B: article 2:31 FSA Exhibit C: article 2:26b FSA Exhibit D: (Re)insurance lines underwritten by Captives over the year 2010

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58 58 59 60 60 61 61 62 62 62 63 63 63 66 70 70 73 75 82 86 91 93 96 105 106 107 108

1. Introduction In our society rapid technological developments take place. Because of these rapid technological developments, new uncertain risks arise. This happens while the acceptation of risks declines.1 A way of dealing with risks is obtaining insurance. This can be difficult if not impossible as these risks are highly uncertainty. Some big corporations have a captive in place; perhaps this can offer a solution. The captive then covers these uncertain risks in order to redeem the injured persons. Those injured persons will be the persons who bought the product or service on the market. But how well are these third parties protected?

Take notice that the risks we are already familiar with are not the type of risks meant, because for those risks a sufficient method of approach already exists: the classical risk approach. This approach deals with risks which are familiar because of scientific research. The risk is estimated and accordingly managed. Whenever a familiar risk is not managed appropriately and it realizes, the one neglecting to take the necessary precautions has to pay for the damage.2 When one is not familiar with a certain risk, that person can still be held liable because of the objectification of the demand of knowing the risk. This means that in the case-law the person is compared to a ‘reasonably acting and reasonably competent colleague’.3 If there still is insufficient information present, the social views at the time of the negligent act or omission are of importance.4 For example, the danger of asbestos was not known in its early stage, but increased during the passing of time. The duty of care is higher when the social environment of the person creating the risk is familiar with the fact that working with asbestos comes with certain dangers. As the knowledge of a certain danger increases, the duty of care also increases.5

The risks meant here are those you are not aware of, but it is foreseen there are some unknown risks possible to arise in the future. As a consequence of several developments, such as the developments on the areas of science and technique, new risks arise for which the normal

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A.Ch.H. Franken & I. Giesen, ‘Het voorzorgsbeginsel: over nieuwe en onzekere risico’s’, AV&S 2010, 21. WRR-rapport, Onzekere veiligheid. Verantwoordelijkheden rond fysieke veiligheid, Amsterdam: WRR 2008, p. 58 e.v. and p. 141 e.v. 3 HR 17 december 2004, NJ 2006, 147 (Hertel/erven Van der Lugt). 4 Idem, r.o. 3.7 under b. 5 Idem, r.o. 3.8.

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liability law does not offer a solution.6 It is because of this shortcoming of the law that uncompensated damage exists. Nowadays, occupational diseases such as Repetitive Strain Injury (RSI), stress and Obstructive Pulmonary Disease (OPD) as a consequence of inhalation of asbestos are familiar, but who knows what lies ahead. Think of the consequences of exposal to hard wood dust and quartz dust, but also of exposal to radiation and the risks of the mobile phones.7 Or take nanotechnology as a more recent example; the companies involved in this type of technology evolved rapidly, as did their products. However, these evolutions were not controlled in a sufficient manner and above that the companies did not reserve sufficient finances in order to compensate those who might get injured. In order to prevent such uncertain risks to materialize measures have to be taken. The desire to take such measures became clear after the report named ‘Uncertain safety’8 coming from the Scientific Council for Government Policy (‘Wetenschappelijke Raad voor het Regeringsbeleid; WRR’ in Dutch), an advisory institution for the Dutch Government of 2008.

As mentioned before, a way of dealing with risks is obtaining insurance. By doing so the wrongdoer does not have to indemnify the injured person out of its own resources. Instead, the risk of liability moves from the perpetrator towards the insurance company.9 The definition of insurance is, according to article 925 of Book 7 subsection 1 of the Dutch Civil Code (hereafter: ‘DCC’) as follows:

‘Insurance’ is a contract whereby one party, the insurer, undertakes toward the other party, the ‘policyholder’, in consideration of a premium to make one or more payments, when, at the time the contract is concluded, there is no certainty for the parties whether, when or up to what amount any payment must be made, or even how long payment of the agreed payment of premium will last. Insurance is either indemnity insurance or benefit insurance.

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Mr. N. Vloemans, ‘Events are in the saddle … the terrible ifs accumulate: Over onzekere risico’s en voorzorg in het aansprakelijkheidsrecht’, AV&S 2010, p. 8-12. 7 M. Faure & T. Hartlief, Nieuwe risico’s en vragen van aansprakelijkheid en verzekering, Deventer: Kluwer 2002, p. 1-2. 8 WRR-rapport, Onzekere veiligheid. Verantwoordelijkheden rond fysieke veiligheid, Amsterdam: WRR 2008. 9 J. Spier e.a., Verbintenissen uit de wet en schadevergoeding, Deventer: Kluwer 2009, p. 10; see also S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 18.

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The requirements of an insurance contract are thus the following: Firstly, there has to be a reciprocal agreement between the insurer and the insured. Secondly, the insured periodically makes premium payments and the insurance company pays out after the insured event took place. This can be either in money, products or services. Thirdly, both the policyholder and insurer have to be uncertain about if and when the insured risk happens. This uncertainty can concern when the insurance payments have to be made, how high these payments will be or how long the premium payments will last. 10 The final conditions that have to be met are the further requirements of the indemnity insurance11 ex article 7:944 DCC, or those of the benefit insurance12 ex article 7:964 DCC.

As mentioned before, the classical risk approach does not offer a solution for uncertain risks. But what methods already exist in order to cover those type of risks? Possible solutions are: the social security, liability law, ex-ante insurance for a victim, solvency guarantee, reinsurance by the government, using a collective insurance such as a fund and the mandatory insurance for corporations whom may have to deal with such risks.13 However, with some of these solutions the occurred damage is not paid by the perpetrator of the damage. This is contradictory to one of the fundamentals in liability law; the person causing the damage has to pay for that damage. In addition, another function of liability law is the prevention of damage;14 this can only be upheld when the wrong-doer pays for the damage himself. Because then the wrong-doer will take the expected costs into account. The anticipated costs will be higher as a result of which he will refrain from the wrongful act. As a consequence, the social security, insurance for the victims and reinsurance by the government are not preferable solutions. Apart from that, there are often insufficient financial means at the damage causer, especially in expensive cases such as mistakes in technological developments as a result of what liability law offers inadequate or no consolation. As for the funds, a recovery claim can be made but that merely redistributes the

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Asser/Clausing & Wansink 5-VI 2010/18-27; see also S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 36-45. 11 Insurance for compensation or loss of property or damage to property. 12 For this type of insurance, compensation of the loss is irrelevant. It is mostly used as a life-insurance. 13 M. Faure & T. Hartlief, Financiële voorzieningen na rampen in het buitenland, Den Haag: Boom Juridische Uitgevers 2006, p. 138-152. 14 A.J. Verheij, Monografieën privaatrecht: Onrechtmatige daad, Deventer: Kluwer 2005, p. 16-18.

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damage; it is only a compromise. Then the option of mandatory insurance for corporations remains. However, this is not the ultimate solution because insurance companies cannot handle that amount of claims, because the risks are impossible to estimate, as is the damage that might occur. As a consequence, the premium payments will be excessively high. Finally, the solution of the solvency guarantee remains but since the risks are difficult to estimate, the height of the guarantee is impossible to determine. Concluding, no adequate solution has been found.

But perhaps the captive offers a solution for dealing with uncertain risks. As a captive covers risks that are not possible to cover on the conventional market, or at least not for an acceptable price. The uncertain risks described above are difficult or impossible to cover on the conventional insurance market, therefore a captive can be used to offer coverage. Keep in mind that the term ‘captive’ used here, does not refer to people living as in a prison, but to a selforganized insurance company known as the ‘captive insurance company’ (hereafter: ‘captive’). Most people are not familiar with these captive. This is not peculiar as it is an internal insurance company in a multinational conglomerate. Captives are private insurance companies which make it possible for a corporation to insure itself. The corporations of the group make premium payments towards the captive. The captive is obliged to pay out when the damage materializes, as far as it has been agreed upon.15 Captives are thus similar to the conventional insurance company. A captive can offer a solution because it is well funded. For every euro of capital, the European single-parent captive16 writes €1,05 of net premiums at the end of 2009.17 And billions in premiums are paid to the captive worldwide. More precisely, over 9 billion dollar in premium payments was made to the captive in only the United States of America in the year 2005.18 After the year 2005, the market of the captive has increased although the growth stagnated during the financial crisis.19

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J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 1 16 See paragraph 2.2.2 for a description of a single-parent captive. 17 Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com, p. 8. 18 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. xiii. 19 Report of Marsh, Captive benchmarking report: Single parent captives, a global analysis, 2009, www.marshcaptivesolutions.com; Report of Marsh, Single parent captive benchmarking: Capital and

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The conventional insurance company is bound by legal rules that protect the interests of third parties. When a captive is equal to such an insurance company, the same rules should apply. It is unfamiliar what a captive exactly is and up to what level they are equal to the conventional insurance company. This gives rise to the question what captives are legally bound to and to what rules they should be bound. This results in the following research question:

What guaranties for third parties does the captive insurance company offer compared to the conventional insurance company for example related to redeeming damage originating from uncertain risks? And what guaranties should be offered to third parties?

In order to answer the research question the captive will be described under Chapter two. In order to achieve a clear understanding firstly the conventional insurance company will be described. Thereafter the focus lies on the captive and the several forms it can have. Chapter three focuses on the reasons for choosing a captive. Therefore both the positive effects and the downsides of using a captive will be discussed. Under Chapter four and five the legal framework will be addressed. Chapter four focuses on the Financial Supervision Act by which the insurance company and captive are bound. Supervision on financial entities starts by applying for a license. Therefore, the license requirements of both the captive and insurance company will be addressed and compared to one and another. Chapter five discusses the legal rules of the Dutch Civil Code related to third parties. In this Chapter several articles will be addressed: article 3:287, the direct action and insurance on behalf of third parties. After describing the articles, the applicability of those articles for the captive will be discussed. Finally, Chapter six contains the overall conclusion.

Collateral, 2010, www.marshcaptivesolutions.com; see also Report of Marsh, Trends and performance: 2011 Captive Benchmarking, 2011, www.marshcaptivesolutions.com.

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2. What is a captive insurance company and how similar are they to the conventional insurance company?

In order to formulate an answer to the research question mentioned above we need to know what a captive is. The first step in creating such an understanding is explaining what a captive is and how it functions compared to the conventional insurance company. Therefore, the insurance company and its requirements will be shortly discussed below. Thereafter the focus lies at the captive.

2.1. Insurance company

An insurance company takes over a risk of the insured party in exchange for premium payments and pays out to the insured party when the risk realizes. This results in cash-flows between the insured and insurance company. With the received premium payments the insurance company covers its own business costs. In order to calculate the adequate height of the premium payments, the following formula is used: frequency of the damage x average sum of damage. 20

In the insurance field, a difference is made between life and non-life (also mentioned ‘other’) insurance. This is of legal importance, because the two are treated differently under the law. Under article 1:1 of the Dutch Financial Supervision Act a life insurance is described as: “a life insurance contract as referred to in article 975 of Book 7 of the DCC, on the understanding that the life insurer’s performance is made only in money or a funeral expenses and benefits in kind insurance contract as referred to in this section”. In order to achieve a clear understanding let us take a look at article 975, it states that: “A life insurance is the in connection with the life or death closed insurance providing fixed-sum payments on the understanding that an accident insurance is not considered as a life insurance”. This type of insurance thus pays out when one died or stayed alive on a certain date or in a certain period. On the other hand, a non-life insurer is according to article 1:1 of the Dutch Financial Supervision Act: “a party that has as its business the conclusion of non-life insurance contracts for its own account and the settlement of such

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S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 19-22.

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non-life insurance contracts”. This concerns the following types of insurances: an accident insurance, an insurance for compensation of the capacity damage and an insurance contract providing for payment of a capital sum. On the understanding that, insurance is only deemed to be non-life insurance if it involves a payment obligation as a consequence of an uncertain event or an uncertain circumstance that affects the insured party’s interests.

The difference between life and non-life insurance is also of economical importance because in the case of a life insurance it is absolutely sure that the insured event (death) will take place, it is only unfamiliar when the person will pass away. On the other hand, with non-life insurance it is uncertain whether the insured event will ever realize. It is because of this that a life insurance is a contract which states that the defined sum of money has to be paid, when the insured party dies. Contrarily non-life insurance is a contract to indemnify damages which really occurred. It thus only pays up to the mouth to the loss suffered.21 Hereafter, the focus lies at the non-life insurance.

Another difference that can be made is between first party insurance and third party insurance. Under the first party insurance, a person insures its own property. By the third party insurance, a person obtains insurance for situations he or she can be held liable and has to pay damages to the injured party.22 The focus hereafter will lie at the third party insurance.

When an insurance contract is created, the insurance company and the insuring party are of importance. The main duty of the insurer is paying out under certain conditions which are laid down in the terms of insurance. The insuring party, also mentioned the policy holder, is the other contracting party whom has certain rights and duties originating from the insurance contract. The policyholder has the right to cancel the contract. The final party that is of importance, as the focus lies at third party insurance and it concerns a non-life insurance, is the injured party whom benefits from the insurance according to article 7:945 DCC23 because when

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J. Birds, Birds’ modern insurance law, London: Sweet & Maxwell 2007, p. 4-5; see also S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 22-23. 22 J. Birds, Birds’ modern insurance law, London: Sweet & Maxwell 2007, p. 3-4. 23 Kamerstukken II 1985/86, 19 529, nr. 3, p. 3 (MvT).

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there is damage, the injured party can be indemnified. The person who receives payment does not need to be the policyholder.24

The situation is as follows: the insured party makes premium payments towards the insurance company and the insurance company in return offers insurance for third party liabilities of the policyholder. When none of the covered risk materializes, the insurance company does not have the duty to pay out. But when the insured party injures a third party and thereby realizes one of the insured risks, the third party has the right of indemnification towards the policy holder. The policyholder, in its turn is entitled to payment from the insurance company. This situation is illustrated in figure 1.

Figure 1. Relationship between insurance company, insured party and injured party.

The injured party informs the insured party it want to be indemnified, then the insured party has the duty to report the damage to the insurance company in accordance with article 7:941(1) DCC after which the insurance company shall pay out the money towards the insured party. This is a lengthy road and it can be shortened by using the direct action as laid down in article 7:954 DCC. This direct action gives the injured party the opportunity to go directly to the insurance company and ask for indemnification. The direct action shall be further discussed under Chapter five.

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Wansink & Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 945 Boek 7 BW, 2010; S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 62 and 71-72; see also T.L. Cieremans, GS Bijzondere overeenkomsten, commentaar op artikel 945 Boek 7 BW, 2008.

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2.2. Captive insurance company

Now a basic understanding on the insurance company has been formed, the captive will be discussed whereby firstly we will try to find a definition for a captive where after a general perception of the captive exists. Thereafter the sorts of captives shall be addressed.

2.2.1. General perception of the captive insurance company

There were 5,617 captives throughout the world at the end of the year 2010.25 This is quit a significant number when realizing that this form of insurance in rather unfamiliar. Therefore, to clear up the air the literature was consulted. In the literature however, there are not so many definitions for a captive. This can be explained by the fact that captives are a form of selfcompliance. In other words, they act under the radar.

The main characteristic of a captive is that it only insures the risks of the group where it is a part from.26 A captive should be seen as an insurance company: it also has reserves27, surplus28, policies, policyholders and claims. In addition, the operating businesses, also known as the

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Report of Business Insurance, Captive insurance report, 2011, www.businessinsurance.com/section/rankings. 26 B.D. Pressman e.a., ‘Alternative liability insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 194-195; A.J. Barille, The captive insurance company: An emerging profit center, Washington D.C.: Interstate Service Corporation 1979; J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 1; OECD Tax Policies Studies No. 3, Taxing Insurance Companies, OECD Publications: 2001, p. 102 (glossary of terms); Van Bitterswijk, De Beursbengel oktober 1998, p. 4 e.v.; P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 1; A. Oosenbrug, ‘Fiscale aanvaardbaarheid van de captive: a never ending story? , in: D.H. Offeren e.a. (red) Overbruggen (J.G. Kuijlra), Leiden 2010, p. 15; W.J. van Breukelen e.a., ‘Specifieke vormen en technieken van riscofinanciering en risico-overdracht’ in: P.J.W. Duffhues (red.) Financiering, belegging en verzekering: Convergentie van financiele markten, Deventer: Kluwer 2006, p. 87; see also L.K. Shayne, ‘Captive Insurance Companies: your risk management angel’, The CPA Journal 1999-4. 27 By the word reserve is meant the portion of the captive’s assets that cover the issued policies. For this definition see J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 21. 28 By the word surplus is meant all other assets which are not reserves, but can be used to cover new risks. For the definition, see J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 21.

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operating company, brother or sister company of the captive or the subsidiary of the parent makes premium payments towards the captive in exchange for the captive issuing insurance for the risks or the company.29 Placing this information in context the following overview can be outlined:

Figure 2. Placing the captive in context

By using a captive a group of corporations has an alternative to the conventional insurance market. In other words the captive self-funds the risks of the affiliated operating businesses. The group thus made its own insurance company and puts itself on the insurance business. 30 When a captive is licensed31, it has access to the reinsurance market.32 Finally, a captive is located in a domestic country for regulatory and/or tax reasons.33

A difference between the captive and the conventional insurance company is that a captive gets managed by the insured parties and the assets of a captive are owned by these insured

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J.D. Adkisson, Captive insurance companies: An introduction to Captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 1-2. 30 L.K. Shayne, ‘Captive insurance companies: your risk management angel’, The CPA Journal 1999-4; see also B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 194-195. 31 The license and the requirements for obtaining a license will be further described under Chapter four. 32 The reinsurance market should be seen as the wholesale market where lower costs are involved. More information on the reinsurance market can be found under the introduction of Chapter four. 33 J.D. Adkisson, Captive insurance companies: An introduction to Captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 1; OECD Tax Policies Studies No. 3 and Taxing Insurance Companies, OECD Publications: 2001, p. 102 (glossary of terms); see also B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 197. See paragraph 2.2.2 for additional information.

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parties.34 Regarding the insurance company this differs as it owns the assets itself and not its customers. In addition, an insurance company does not get managed by its clients. This expresses the view that a captive stands closer to its clients than an insurance company. However it needs to be added that in order for the captive to be successful, it has to be able to act independently and an arms-length control is thus required.35 This means that the parent company may not have control over the management of the captive. In addition, there have to be specific business goals and plans for the captive. However, the captive should not be seen as an entirely separate part of a group of corporations as the captive should be integrated in the business plan of the whole. At the beginning, a captive is formed in order to reduce the insurance costs of the operating business. But when it has been in place for a longer period, a captive can evolve into a profit-generating company.36

Finally it needs to be addressed that setting up a captive involves high costs37, therefore a captive is mostly used by multinationals.

2.2.2. Sort of captives

What was addressed before was mentioned in order to create a basic understanding of a captive. However, captives exist in many forms and thus not only as the insurer of merely the group where it is a part from. The different forms a captive can have will be addressed under paragraph 2.2.2.1. In addition, captives can be both domestic or offshore. This difference shall be clarified under paragraph 2.2.2.2. Finally, the difference between direct captives and reinsurance captives will be addressed under paragraph 2.2.2.3.

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B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 194-195; A.J. Barille, The captive insurance company: An emerging profit center, Washington D.C.: Interstate Service Corporation 1979; OECD Tax Policies Studies No. 3, Taxing Insurance Companies, OECD Publications: 2001, p. 102 (glossary of terms); Van Bitterswijk, De Beursbengel oktober 1998, p. 4 e.v.; see also L.K. Shayne, ‘Captive insurance companies: your risk management angel’, The CPA Journal 1999-4. 35 W.J. van Breukelen e.a., ‘Specifieke vormen en technieken van riscofinanciering en risico-overdracht’ in: P.J.W. Duffhues (red.) Financiering, belegging en verzekering: Convergentie van financiele markten, Deventer: Kluwer 2006, p. 92. 36 J.D. Adkisson, Captive insurance companies: An introduction to Captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 1-2. 37 See paragraph 3.2 for additional information.

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2.2.2.1. Forms of captives

The form of a captive mentioned before was the one in which the captive was the insurer of merely the group where it is a part from. This sort of captive is mentioned the single-parent captive. This type of captive is a fully owned subsidiary of the parent.38 These single-parent captives can be classified under two forms of captives. Firstly, the pure captive which is formed in order to insure the risks of the parent and its related business organizations. Secondly, a single-parent broad captive, also known as a diversified or open-market captive, can exist that also covers unaffiliated risks of the owner.39 Then, the captive offers coverage for risk outside the group of corporations. The most commonly used form of a pure captive is a corporate captive; this is owned by a large conglomerate or other publicly-traded company.40

Another possibility is that several parent companies are the joined owners of one captive together; this is called the group captive or a multiple-parent captive. Such a captive is created to cover the homogeneous risks, in other words the risks which are the same for each member are covered. Of course, this captive can as the single-parent captive be classified as a pure, or diversified captive. The group captive can be organized in two ways. Firstly, as a stock company with the insured owning some stock of the captive. And secondly, as a mutual company with the insured owning an interest in the captive based on a calculation.41 Although I have to add this is not commonly used, because with more owners, conflicts of interest are more likely to exist. On

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B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 198; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p.29. 39 M. Adams & D. Hillier, ‘The effect of captive insurer formation on stock returns: An empirical test from the UK’, Journal of Banking & Finance 2000, p. 1788; J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 29; see also P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 32-33. 40 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 29-30. 41 B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 198; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 29-31.

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the other hand, this form can be preferred as the creation of a captive involves costs and these costs can be spread over more corporations and thus results in the reduction of costs.42 One type of group captive is the association captive; such a captive is owned by a trade industry or a service group for the benefit of its members in order to increase their buying power.43

The final form I would like to address is the rent-a-captive arrangement. In which the owner of the captive rents a portion of the captive for a fee to third parties. This rent-a-captive is also considered to consist of several business cells in which independent non-insurance clients obtain an equity stake.44 In each separate cell internal separation of liability exits within the company form the others. Therefore, the cell-owner will not bear the costs coming from another cell.45

Hereafter, the focus lies at the pure single-parent captive as this form is commonly used.46

2.2.2.2. Domestic or offshore captive

Another interesting point regarding the sort of captive is that a captive can be domestic, also mentioned onshore, or offshore. An onshore captive is one existing in the main country of the conglomerate where the captive belongs to. These types of captives exist within the United States or the European Union. Because of the regulatory differences between the United States and the European Union a difference between European Onshore and United States Onshore captives is made. On the other hand, the offshore captives exist outside the jurisdiction of the 42

P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 31-32. 43 M. Adams & D. Hillier, ‘The effect of captive insurer formation on stock returns: An empirical test from the UK’, Journal of Banking & Finance 2000, p. 1788; B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 198; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 31. 44 B.D. Pressman e.a., ‘Alternative liability insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 198; see also M. Adams & D. Hillier, ‘The effect of captive insurer formation on stock returns: An empirical test from the UK’, Journal of Banking & Finance 2000, p. 1788. 45 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 32-33. 46 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 29-30.

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main country.47 However, it needs to be kept in mind that once a captive is formed and initially licensed, it can become an admitted carrier in any other jurisdiction where it applies for an insurance license.48 It thus can expand its business from the domestic or offshore primary location. Whenever a captive is domiciled in the European Union, it is an admitted carrier in any other EU country.49 A benefit from a domestic captive is that it can be managed within the operations of the parent corporation. However, as mentioned before, a captive has to be independent and therefore be governed at an arms-length control in order to be successful. Most captives are located offshore in a jurisdiction where the legislative restraints are low and the taxation position is positive50. This results in higher reserves, reduction of management time, quicker establishment of the captive and lower costs of establishment.51 The most popular offshore locations are Bermuda with 845 single-parent captives at the end of 2010 and the Cayman Islands with 738 captives.52

One of the most popular domiciles for America is Vermont, which now accommodates estimated 90053 captives after a steady growth. This state decided that captives could be a revenue earner. Therefore, it started passing legislation favourable to captives. For example, the captive fees are relatively low and captive legislation has been in place since 1981 and has been subject to improvement since. This resulted in a high popularity, which came with benefits for this particular State. The captive industry generates over 1,500 jobs, the captives hold more

47

Report of Marsh, Trends and performance: 2011 Captive Benchmarking, 2011, www.marshcaptivesolutions.com, p. 5-6. 48 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 69. 49 Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com, p. 24. This means that a captive, once licensed in the European Union can conduct its business in any other Member State of the European Union. 50 B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 197. 51 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 33-34; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 79-80. 52 Report of Business Insurance, Captive insurance report, 2011, www.businessinsurance.com/section/rankings, p. 4. See also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 81-85. 53 www.vermontcaptive.com under ‘captive basics’ which can be found under ‘captive statistics’.

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than 1 billion dollars in the banks and the state receives over 20 million dollars in taxes. Because of these benefits, Vermont is eager to keep its top-position concerning captives.54

Regarding continental Europe, Luxembourg is the favoured location, with around the 250 singleparent captives in the year 2010.55 Another interesting detail is that 1,3 percent of all the singleparent captive owners come from the Netherlands.56

Although differences between jurisdictions exist, most popular and aggressive captive domiciles are all about the same, because each domicile copies other domicile’s statutes and adopt any new and attractive provision quickly to stay competitive. The advantages of a unique and advantageous change rarely last longer than a couple of months.57

2.2.2.3. Direct or indirect insurance

In order to have a complete view on the different forms a captive can have, the difference between the direct and indirect insurance market will be addressed. It needs to be mentioned that the two different markets also exist with respect to the conventional insurance company. Therefore, the direct and indirect insurance market shall be described first with respect to the insurance company and the reinsurance company. After this description the direct captive and the reinsurance captive will be described.

An insurer is active on the direct insurance market when the insurer underwrites directly to the client without intervention from others (except for the intermediary between the customer and the insurer). This thus concerns the insurance companies the customer sees directly. Some examples are: Eureko, Delta Lloyd, Menzis and Aegon.

54

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 72-76. 55 Report of Business Insurance, Captive insurance report, 2011, www.businessinsurance.com/section/rankings, p. 6. 56 Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com, p. 5. 57 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 69.

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The reinsurance market is the one behind the direct insurance market. On the reinsurance market agreements are made between the direct insurer and reinsurer(s). In these agreements the insurer insures risks (originating from an agreement made earlier on the direct insurance market) entirely (but mostly partially) with one or more reinsurers.58 The two markets can be seen as follows:

Figure 3. Direct and reinsurance market

A reinsurer only offers insurance to other (direct) insurance companies. It is because of this relationship between professional parties and because of the different approach compared to direct insurance that Title 7.17 DCC is not applicable to reinsurance.59 However, this title can be used when explaining reinsurance agreements in the light of the principles of insurance law.60

Reinsurance is generally cheaper because the reinsurance companies can be seen as the wholesalers and they have lower administrative expenses, lower requirements to comply with and lower or no sales budgets. In addition, reinsurance companies can spread their risks over much bigger pools. Therefore, higher coverage limits can be obtained than what would have been available on the direct insurance market. Of course, it should be kept in mind that the reinsurance company is out to make a profit. Therefore, they will only agree with the cessation

58

Asser/Clausing & Wansink 5-VI 2010/40. S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 50. 60 Kamerstukken II, 1985/1986, 19 529, nr. 3, p. 7 (MvT). 59

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agreement61 if the risk is unlikely to materialize and if the height of the reinsurance premiums is favourable to them.62

2.2.2.3.1.

Direct captive

In principal, the risks are bore by the related business of the captive. With respect to the direct captive these risks are transferred to the captive. The captive thus underwrites directly to its clients without intervention from the conventional insurance market.63 Whenever a captive is mentioned, hereafter the direct captive is the type of captive meant.

To take it one step further, a captive has access to the reinsurance market. It can choose to obtain reinsurance for the risks it covers. As mentioned before, the reinsurance market can be seen as the wholesale market as a consequence of which prices are lower.64 Finally, the chance that a risk materializes can be assigned to the reinsurer(s) whereby the captive enlarges its solidarity and its possibility to carry risks.65 Generally, the reinsurance company only reinsures a percentage of the risk. Of course, the captive has to pay reinsurance premium to the reinsurance company. Taking it all together, the picture is as follows (see figure 2): the related business out of the same group where the captive is a part from makes premium payments (of 100 percent) towards the captive in return for a 100 percent insurance of the insured risk. The captive pays reinsurance premiums to the reinsurance company in exchange for the reinsurance of a certain percentage of the risk.66

61

This is the agreement by which the premiums are paid to the reinsurance company and the reinsurance company takes a percentage of the risk in return. Cessation can be found under article 3:94 of the Dutch Civil Code. 62 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 7-8 and 25-27. 63 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 33. 64 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 7-8 and 25-27. 65 Asser/Clausing & Wansink 5-VI 2010/40. 66 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 6-7 and 25-27.

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Figure 4. Direct captive and reinsurance. (Source: J.D. Adkisson 2006, p. 25)

Whenever the risk materializes, the captive is the one the relate business turns to. The captive has to pay out to the related business. When the risk is reinsured, the captive is entitled to payment of the reinsurance company up to the amount of what is reinsured. The reinsurance company is thus the one where the costs are bore.

In order to prevent the situation that the reinsurer is not able to pay the claim when the captive did pay its reinsurance premiums, premiums withheld reinsurance can be used. This means that the captive does not release the premiums to the reinsurer until the claim is resolved. Accordingly, the captive holds on to the money until it knows the effect of the reinsurance agreement. If the claim is lower than previously estimated, the reinsurer makes a profit and the captive hands over a receipt up to the amount of the profit. On the other hand, if the claim is higher than taken into account in the reinsurance contract, the reinsurer has to deal with the loss. As an alternative or in addition a letter of credit is required of the reinsurer by the captive.67 The provider of a letter is the one who guarantees that the reinsurance company can meet its obligations, usually a bank.

2.2.2.3.2.

Reinsurance captive

Also here in first instance the risks are bore by the related business. However these risks are transferred to an insurance company on the conventional direct insurance market. The risks are thus covered on the direct insurance market. Then, the captive reinsures those risks on the

67

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 27.

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reinsurance market. It generally does so for the entire amount, i.e. 100 percent. A reinsurance captive is thus taking part in the risks of its related business(es) by offering reinsurance over those risks.68 The situation looks as follows:

Figure 5. Reinsurance captive.

In this situation when the risk materializes, the related business turns to the insurance company for insurance payment. The insurance company has on its turn a reinsurance claim on the captive. The costs are thus eventually bore by the reinsurance captive.

Also in this relationship premiums withheld reinsurance can be used by the insurance company. In addition, it is common for an insurance company to require a letter of credit of the captive.69 Normally, the letter of credit is secured in either cash and, or other allowable investments from the captive.70

In summary, captives can exist in many forms, depending on firstly, how many owners they have and who these owners are. Secondly, a captive can be pure or broad which correlates with the events it underwrites: their own or those of others. Thirdly, captives can be either domestic or offshore. Finally, captives can be active on the direct and/or reinsurance market. In the next Chapter the focus lies at finding the reason(s) for choosing the captive insurance company instead of the conventional insurance company.

68

P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 33. 69 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 27; see also E.Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 19. 70 Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com, p. 13.

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3. Reasons for choosing a captive insurance company

From the above, some positive effects of a captive became clear. Firstly, we have seen that a characteristic of a captive is that the undertaking can keep the insurance business under its own control, instead of the external insurance market. Secondly, the captive can involve some tax and regulatory benefits; depending on the location it is formed in. Thirdly, a captive can involve the reduction of costs. We will take a closer look at these positive effects, address more reasons for choosing a captive and there after the downsides of a captive will be discussed.

3.1 Positive effects of using a captive

As mentioned before, a captive covers its own risks. This can be a reason for choosing a captive especially when the conventional insurance market does not meet the financial needs. One of the reasons it does not meet these needs relates to the price. For external insurance, a corporation pays to the insurance company a part for (accounting) expenses, profit, advertising costs, costs of compliance with regulations, commission payments to brokers and general administrative costs. These costs are substantial, even though they are spread over all the insured. Of course, a captive has to deal with costs as well. However, these costs71 are relatively low.72 In addition, premium payments are made in advance; the external insurance company thus holds on to the premium payment until claims are made and have to be paid. For these payments, the conventional insurance company receives interest.73 Above that, the corporation is not in a position to alter the moment when premium payments are made. Contradictory, when using a captive there is a higher flexibility when premiums have to be paid so timing

71

These costs for a small captive are usually around the $50,000 per year. Compared to a conventional insurance company, where normally a 3% agent’s commission exists over a $1,000,000 premium, the agent’s commission is equal to $30,000 and then only the agent’s commission cost is taken into account. See J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 3 and 6. See also Chapter four for the minimum capital requirement and the solvency requirement. 72 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 13; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 3. 73 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 13-14.

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deductions for tax purpose can be achieved.74 Finally, the insurance company receives investment income for the profit coming from the insurance contract made with the corporation.75 In addition, when the premiums paid stay in the captive, investment income can be earned by the captive. In other words, investment returns will be earned within the captive.76 A second reason why the conventional insurance company does not meet the financial needs of a corporation is that the insurance company does not require the adequate amount of premium payments. By establishing a captive, a corporation is able to take its own loss experience into account and set its own premium payments, without any influence from others in the external market which constitute to the increase or decrease of the premiums depending on the average loss experience. This means that when a company has a low average loss experience, it subsidizes the companies with a higher loss experience in the external insurance market.77 Another point of importance is that a commercial insurer, trying to sell insurance to a corporation, will keep in mind that that corporation has an alternative in the form of a captive. Therefore, it is argued that the insurer will create a better offer in order to keep or obtain that corporation as a client. The same is true for the insurance agent, who sometimes lowers its own commission in order to get the commercial insurance sold. Having a captive thus functions as a negotiation tool.78 However, this is only true for situations where excessively high premiums are involved. Fourthly, captives stabilize insurance budgets which fluctuate in the conventional insurance market. This fluctuation exists because of the activity of the insurance companies on the investment market. These insurance companies decrease their premiums in order to attract more money for investing when the investment markets to well. Conversely, when investment markets are unsatisfactory, the premium will increase. The changing position on the investment

74

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 5. 75 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 13-14. 76 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 3. 77 B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 196; P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 15-24; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 4-6. 78 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 3-4.

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market makes the premium fluctuate, even though the made claims did not vary. By the use of a captive, as aforementioned, the corporations own claim experience will be taken into account it will thus be based on real predictions contrary to investment profits or losses. When external insurance is cheap and the investment markets are doing well, a captive can reserve premium payments and use these reserves when external insurance is expensive by, for example, raising deductibles under the captive which lowers the insurance costs.79 Finally, in some circumstances, as in the liability area, insurance companies are not willing to provide insurance, or only against excessive premium payments.80 Some reasons that make an insurance on the conventional insurance market difficult or even impossible are: the expected damages are excessively high, the expected damage cannot be calculated, the happening of one event results in cumulating damages (a terroristic attack leads to damages with other insured parties) and a bad claims thread; when the insurer makes a loss every year by insuring some types of events, such as a jewelry shop.81 As an example for the first reason, in America the building contractors have to deal with excessively high costs when the contractor is held liable, this resulted in higher premium payments and a decrease in the insured cover, which made conventional insurance unaffordable. 82

A captive can provide customized insurance contracts more easily. However, the actions of a captive have to be in line with the market, i.e. the conditions have to be market-orientated. But if one out of the hundred insurers would offer those conditions, it can be classified as marketorientated. Finally, a captive gives more claims control by which is meant that the captive’s owner itself decides how to settle the claim: by litigation or settlement. In addition, the captive’s

79

B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 196; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 2-3. 80 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 15-24; see also B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 196. 81 S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 18-19. 82 D.F. Parlett, ‘Defective Structures and Economic Loss in the United States: Law and Policy’, in: J. Neyers e.a., Emerging Issues in Tort Law, Oxford: Hart Publications 2007, p. 233-250.

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owner can decide to hire more specialized attorneys than ordinary insurance defense counsel. Some argue that this is the main reason to create a captive.83

The second advantage of forming a captive is access to the reinsurance market, as explained under paragraph 2.2.2.3, because reinsurers operate on lower costs structures than direct insurers, who need to provide services to their industrial and personal customers. The costs are lower in the reinsurers market, because it functions as the wholesale market of the insurance industry. When a corporation has access to the reinsurance market, it can decide how much of the low-level claims it wants to retain in its own corporation and buy reinsurance coverage above a certain level. The captive owner thus can choose the risks it wants to retain internally. Accordingly, he can keep the more profitable parts and leave the more costly or risky ones on the general insurance market, however it needs to be added that reinsurance companies will only participate where significant premiums are present.84 There is another way by which the captive owner can choose the way of managing its risks like the insurance company: it can choose to insure above a certain amount of damage. There are two ways to organize this. Firstly, by giving the policyholder a personal risk; only the amount above that personal risk is insured. This type is commonly used for insuring motor vehicles, the main purpose is exposing the policyholder to some risk which makes him or her behave more carefully and result in less damage; it thus gives the proper incentives. This reasoning does not work for the captive, as the costs will be borne by the conglomerate anyway and therefore the incentives for the operating business are not so strong. In addition, the operating business would keep the costs of the personal risk which might not fit in the risk-management of the conglomerate. Therefore, it is unlikely the captive uses the personal risk. Secondly, a franchise can be used in order to only insure risks above a certain amount. With a franchise, the insurer pays out after that certain amount has been reached. This is different from the personal risk because the entire amount, even below that certain amount is paid for. This is interesting from the insurers view as small damages will not be claimed as a result of which the load of claims decreases which makes the

83

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 5-9 and 56. 84 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 25-26; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 7-8.

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(administrative) costs lessen.85 Depending on the risk-management of the conglomerate the franchise can be interesting and cost-saving.

Thirdly, using a captive reduces insurance company costs. These reductions consist firstly, of the previously-mentioned insurance company expenses, which are borne by the entire portfolio, whilst the corporation is only a part of it. Secondly, of the costs involved with acquiring a new business which is not in line with the captive business. Finally, the cash flows benefitting the insurance company from the premium payments made by the corporation.86

Fourthly, a captive gives incentives to reduce the insurance costs. When no captive is in place and the corporation is insured under a commercial insurer, the incentives to reduce claims or losses are low. A captive requires a clear view on claims and loss data; this gives incentives to the captive’s owner to improve the loss prevention programs.87

Finally, a captive can come with some taxation advantages. Firstly, without the premium payments towards the captive, the money would remain in the operating business (or a fund) with the result that taxes have to be paid. When using a captive, the money gets transferred from the operating business in the captive. The premium payments are pre-tax therefore, taxation is avoided. Secondly, a captive can build up reserves, in other words, it can take a current-year tax deduction for contributions to its reserves, without a tax penalty that would exist when using an internal fund. Accruing these reserves lowers the captive’s earnings and it is because of this the captive can manipulate its reserves and create current-year deductions that can offset the investment gains.88

85

P. Clausing, J.H. Wansink & C. Asser, Handleiding tot de beoefening van het Nederlands burgerlijk recht. 5. Bijzondere overeenkomsten. Deel VI. De verzekeringsovereenkomst, Deventer: Kluwer 2007/307. 86 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 26. 87 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 9. 88 P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 26; see also J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 11-13.

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3.2 Downsides of using a captive

On the other hand, certain disadvantages of a captive exist as well. First of all and most clearly, an insurance company has a much higher spread of risk. Therefore, a conventional insurance company can retain much higher levels of risk on an individual basis than a captive will achieve, especially in its early stage. As a counterargument it can be said that a captive has access to a higher spread of risk by using the reinsurance market. However, when a corporation has a low spread of risk and very high levels of value, the reinsurance costs will be so high that the rest of the amount to fund in retention under the captive is too excessive. A captive is unlikely to exist under these circumstances.89

Secondly, when a captive is willing to issue insurance for which cover is not available on the conventional insurance market, it is difficult for that captive to justify the premium payment by using statistics because of the lack of experience. A response to this difficulty is looking at previous loss-experiences, but if such knowledge is absent, it is particularly difficult to calculate the right number and to justify those numbers.90 However, this difficulty also exists for insurance companies.

Thirdly, captives have to comply with regulation on the subject of capitalization requirements or reserves for high-level exposures which can be a disadvantage for start-up-captives. Above that, the reinsurance market is inclined to be experience-rated, this makes the loss history related to the reinsurance cost, which makes the loss control of the company of importance. A significant loss could therefore change the position in the reinsurance market weightily. In addition, the legislation will not only be a restraint for the start-up captives, but also for the existing captives. In addition, also the official authorities and governmental control can result in restraints. These restrains consist of more prescriptions and requirements which lead to possible delay and

89

P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 27-28. 90 B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 194; see also P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 28.

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higher costs of compliance.91 Although this downside of the captive has decreased in importance because the competition on the world market to become or keep to be the main captive domicile resulted in less costs and delay since the legislation was altered.

Fourthly, forming a captive is expensive as in most jurisdictions the minimum capitalization requirement is normally no less than $100,000.92 Additional capital can be required in order for the captive to keep solvent.93 In addition, the presence of a captive requires additional proceedings and the captive business has to be implemented in the undertaking, this results in costs. 94 More precisely, the costs of forming a captive will start at $100,000 for simple captives and rises as the start-up captive is larger. The annual costs to keep it existing for a small captive is around the $50,000 per year. In total this comes down to $250,000. Because of these high costs forming a captive is only a cost-saver if the premium payments exceed $300,000 – $500,000.95 Other authors believe setting up a captive requires $545,000 in total. The exact number probably lies in between. In addition, forming a captive takes time, at least 90 days96 this may seem like a long period, but several steps have to be taken. All these steps can be seen under Exhibit A together with the passing of days.

Fifthly, a captive has an insurance license, but this is not a general license to offer insurance towards any person or institution. The license is a restricted license since it can only insure the owner of the captive and those subsidiaries, act as a reinsurer and only in the domicile it has

91

P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991, p. 28-29. 92 In the Netherlands the minimum equity capital required is for a direct captive 2,3 million Euros or 3,5 million Euros. The required minimum for a reinsurance captive is 1 million Euros. See paragraph 4.1.9 and 4.4.4. 93 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 21 and 54. In the Netherlands, additional solvency requirements exist. See paragraph 4.2.5 and 4.4.5. 94 P.J.W. Duffhues, Financiering, belegging en verzekering: Convergentie van financiële markten, Deventer: Kluwer 2006 , p. 91-92. 95 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 25 and 46. 96 B.D. Pressman e.a., ‘Alternative liability Insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 194-199.

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acquired the license.97 In the European Union agreements were made on this matter with the result that when a captive is domiciled in the European Union, it can offer insurance in any other EU country. 98 However the opposite is also true, thus when a captive is licensed under a nonmember of the European Union, it has to apply for a license in the EU and when a member of the European Union goes outside the territory, it has to apply for a license as well. Generally, the country will grant the license, however this will not always be the case as that local jurisdiction does not see the captive as an authorized insurer in the territory it wants to sell insurance, because a risk is situated over there. In such a situation where the insurance cannot be written directly towards the captive, a fronting arrangement can be used whereby a local insurance company (also known as the fronting company) insures the company requiring insurance and the captive is a reinsurer.99 The fronting company does not do so for free and has to bear risks and administrative expenses, therefore it retains a percentage of the premium, generally between the 5 and 10%.100 When a conventional insurance company would be used, these costs would be included in the premium. Because of making use of the captive the expenses become clear, which offers the possiblility to reduce costs.101 The fronting arrangement can be seen under Figure 4.

Figure 6. Fronting arrangement. (Source: J.D. Adkisson 2006, p. 28.)

97

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 23. 98 Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com, p. 24. 99 Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com, p. 12. 100 J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 28; see also W.J. van Breukelen e.a., ‘Specifieke vormen en technieken van riscofinanciering en risico-overdracht’ in: P.J.W. Duffhues (red.) Financiering, belegging en verzekering: Convergentie van financiele markten, Deventer: Kluwer 2006, p. 90. 101 E. Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 19.

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Finally, one of the pros mentioned before was that the captive has access to the reinsurance market. This remains true, but the reinsurance market is only interested in high premium amounts. Most will only be interested when the reinsurance premium is no less than one million dollar.102

Concluding a captive can only be created when the premium payments are substantial, whereby access to the reinsurance market can be used in reality.

102

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006, p. 7-8 and 24.

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4. The legal rules of the Financial Supervision Act by which the insurance company and captive are bound

The Dutch Financial Supervision Act came into effect on September 28th 2006.103 It regulates the supervision on the financial market. Before its enactment this area of law was regulated by eight other regulations. These other regulations were only applicable for a certain sector of the financial market. For the insurance sector, the Insurance Company Supervision Act 1993 (in Dutch: ‘Wet Toezicht Verzekeringsbedrijf’) was of importance.104 Different types of sectors are thus now regulated under one Act.

The focus of the Financial Supervision Act lies at achieving certain effects on the financial market. These effects are making the financial markets effective, market-orientated and transparent.105 With market-orientated is meant that the new legislation is created in order to improve the competitiveness of the Dutch financial system in a national and international aspect.106 Effectiveness is tried to achieve by the use of the ‘twin peaks-model’. This model means that now there are two supervisors, leaving the sector-approach behind. The two peaks meant are: peak one for the supervision of the solidarity of the financial undertakings (i.e. prudential supervision) and the other for supervision of the way players in the financial market (should) behave (i.e. behavioural supervision).107 The Dutch Central Bank (hereafter: “DCB”) is according to article 1:24 FSA assigned with prudential supervision. And according to article 1:25 FSA the Authority for the Financial Markets (hereafter: “AFM”) is appointed for the behavioural supervision.

The prudential rules (enforced by the DCB) are focused at the financial solidarity of the enterprise and the contribution to the stability of the financial sector. The aim is protecting the 103

See the heading of the Dutch Financial Supervision Act. F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p. 2-3; see also L. Silverentand (red.), Hoofdlijnen Wft, Deventer: Kluwer 2010, p. 3. 105 R.J. Schotsman (red.), Praktijkgids Wft: Financiele markten en ondernemingen onder toezicht, Amsterdam: NIBE-SVV 2009, p. 88. 106 Kamerstukken II 2003/04, 29 708, nr. 3, p. 4. 107 C.M. Grundmann- van de Krol, Koersen door de Wet op het financieel toezicht, Den Haag: Boom Juridische uitgevers 2010, p. 15; see also L. Silverentand (red.), Hoofdlijnen Wft, Deventer: Kluwer 2010, p. 3. 104

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customers of financial services. This is necessary because of the information asymmetry between the client and the provider of financial services. For that client, it is difficult to assess the solidarity of the provider. The DCB has the means to make such an assessment. This contributes to the confidence in the financial sector. The confidence and stability of the financial sector also need to be protected under the prudential supervision.108 The DCB rates the financial soundness of enterprises for example by controlling their procedures on risk control.109 Speaking more broadly, the supervision goals of the DCB are creditor protection, protecting the interests of the policyholder and soundness of the financial system.110

The behavioural rules (enforced by the AFM) aim at the external behaviour of the enterprise: it focuses on orderly and transparent financial market process, integrity in relations between parties on the financial market and due care in the provision of services to clients and consumer protection.111 It concerns internal procedures that describe how to treat parties externally. Also for behavioural supervision protection of the customer and the functioning of the financial market in general are protected.112

A financial undertaking only needs a license from either the DCB or the AFM. It depends on the type of business the enterprise is involved in which one should be addressed. When an enterprise mostly deals with behavioural rules, the AFM is the provider of the license. On the other hand, when the enterprise is mainly involved with prudential rules the DCB offers a license. This latter is the case for an insurance company.113

108

Kamerstukken II 2003/04, 29 708, nr. 3, p. 29; see also R.J. Schotsman (red.), Praktijkgids Wft: Financiele markten en ondernemingen onder toezicht, Amsterdam: NIBE-SVV 2009, p. 147-148. 109 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 4-5. 110 S. Wesseling & B. Boertje, ‘FIRM brengt risico’s bij financiële instellingen in beeld’, Bank- en Effectenbedrijf, 2006-7/8, p. 19. 111 Kamerstukken II 2003/04, 29 708, nr. 3, p. 28-29; see also Kamerstukken II 2005/06, 29 708, nr. 19, p. 312. 112 C.M. Grundmann- van de Krol, Koersen door de Wet op het financieel toezicht, Den Haag: Boom Juridische uitgevers 2010, p. 622. 113 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p. 4-5; see also C.M. Grundmann- van de Krol, Koersen door de Wet op het financieel toezicht, Den Haag: Boom Juridische uitgevers 2010, p. 622-623.

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Under paragraph 2.1 the definitions of the life insurer and the non-life insurer were given. This difference is of importance because the FSA has different rules for those types of insurance. As mentioned before, the focus here lies at the non-life insurer.

The FSA starts with a general part which contains subjects relevant for both the prudential and the behavioural supervision. The second part focuses on the market access of financial enterprises. Over here, the market access of an (re)insurance company is regulated. The third part deals with prudential supervision of financial enterprises, such as an insurance company. The fourth and fifth parts give rules for the behavioural supervision. The fourth part deals with financial undertakings and the fifth part focuses on financial markets. Part six is reserved for the supervision of the financial market infrastructure. And the final part contains the final provisions.

What will be examined are the requirements of entering the financial market for the different types of insurance companies. This is of importance as this is the first check. This check is not only relevant for the financial market, but also for third parties. As they depend on the financial strength of the insurer. The financial market can be entered by acquiring a licence. Such a licence shall be given when it is in accordance with the relevant articles of the FSA. Thereto, especially part two and three of the FSA are of importance. As seen before, a difference is made between direct insurance and indirect insurance. Therefore in order to achieve a complete overview of the requirements the following forms shall be compared: insurance company, captive, reinsurance company and reinsurance captive.

After an insurance license has been acquired, the DCB keeps on supervising the insurance companies. In order to do so, the DCB uses the FIRM (stands for Financial Institutions Risk analysis Method, ‘Financiële Instellingen Risicoanalyse Methode’ in Dutch). With this risk-based method risk-profiles of financial institutions are made. In order to create a risk-profile the following inputs are used: solvability, liquidity, management and organisation and sound business. The supervision activities of the DCB are more intensive as the risk-profile increases. It should be kept in mind that the DCB protects its supervision goals (creditor protection, protection of the interests of the policyholders and soundness of the financial system). This - 33 -

means that if the goals are not threatened, the supervision is less (paragraph 2.2.2. of the FIRM manual of November 2005). By using the FIRM the DCB is able to use its capacity efficiently.114 The FIRM is also used to deal with complex financial group structures. The group is decomposed in functional activities. By doing so, the DCB obtains a clear view on what risks are in place in several parts of the group, amongst which the captive.115 It is up to the DCB to decide whether the choices made by the management result in unacceptable risks or not.116 When describing the requirements for the specific form of insurance company, announcements will be made when supervision is different because the use of the FIRM.

In order to compare and draw conclusions, the license requirements have to be addressed. Thereto the conditions for obtaining a license of the insurance company shall be discusses first under paragraph one. Thereafter only the conditions that are different for captives shall be addressed under paragraph two. The same will be done for the reinsurance company and the reinsurance captive under paragraph 3 and 4. Where after an overview shall be obtained. Then, the differences between the four forms of insurance companies shall be determined and it will be discussed whether these differences are correct or not.

4.1 License requirements for the insurance company

Article 2:27 FSA states that a non-life insurer may only conduct its business if it has a license from the DCB. The requirements for such a licence are listed under article 2:31 FSA (see exhibit B). We will firstly go through these requirements. However, these are not all the requirements possible as a Decree can place additional requirements (subsection 4 of article 2:31 FSA). These conditions shall be discussed below as well. A point of interest is that the DCB does not have discretionary power. In other words, when the insurer fulfils all the requirements, the DCB is

114

S. Wesseling & B. Boertje, ‘FIRM brengt risico’s bij financiële instellingen in beeld’, Bank- en Effectenbedrijf, 2006-7/8, p. 18-21; See also DNB Kwartaalbericht, ‘Financiële instellingen in beeld’, juni 2006, p. 78-83 and A.C.F.J. Houben & R.H.J. Mosch, ‘Focus op risico’s in nieuwe toezichtvisie DNB’, Banken Effectenbedrijf, 2007-3, p. 8-10. 115 DNB Kwartaalbericht, ‘Financiële instellingen in beeld’, juni 2006, p. 78-83; see also S. Wesseling & B. Boertje, ‘FIRM brengt risico’s bij financiële instellingen in beeld’, Bank- en Effectenbedrijf, 2006-7/8, p. 1821. 116 Paragraph 2.2.1. FIRM manual of 2005. Under Chapter 2; Itroduction of FIRM.

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obliged to give a license. On the other hand, when one of the requirements is not met, the DCB is not allowed to give a license. However, when it comes down to deciding whether or not conditions have been met under certain circumstances, this decision has been left to the discretion of the DCB.117 Another point of interest is that not all requirements have to be fulfilled at the time of applying for a license. It is of importance that all conditions have been met at the time of receiving the insurance license.118

4.1.1

Expertise

The first requirement is that the day-to-day policy has to be determined by experts in that field (article 3:8 FSA). With the wordings day-to-day policy is meant the policy and decision-making aimed at the actual daily business of an insurance company. And with policy is meant the policy and policy-making aimed at the long-term strategy of the insurer.119 This condition makes clear that the insurance company can be held liable if the policy is not made by an expert. Of course, most of the day-to-day policy will be determined by the directors. However, the legislators shared the opinion that also others could determine the policy because of influence the they have. By the wordings used, the insurance company can be held liable as well for nondirectors.120 The requirement of expertise is not further specified. However in order to obtain a license, the following information is required by the DCB in order to make a judgement on the expertise: personal details, identity card, curriculum vitae, relevant certificates and jobreferences of the persons who are determining the day-to-day policy.121

117

Boshuizen & Jager, T&C Verzekeringsrecht, Vergunningeisen levens- of schadeverzekeraars bij: Wet op het financieel toezicht, artikel 2:31. 118 Kamerstukken II 2004/05, 29 708, nr. 10, p. 204-205 (NvW). 119 Kamerstukken II 1993/94, 23 544, nr. 3, p. 2 (Kabinetsnota ‘Beleidsvoornemens inzake Financiële conglomeraten en het toezicht op banken en verzekeraars’). 120 (Eerste) nota van wijziging Wft; see also F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 433 and Boshuizen & Jager, T&C Verzekeringsrecht, Deskundigheid dagelijks beleidsbepalers bij: Wet op het financieel toezicht, Artikel 3:8. 121 Article 12 paragraph 2 juncto paragraph 1 under g of the Decree on market access of financial corporations FSA (‘Besluit Markttoegang financiële ondernemingen Wft’ in Dutch); see also L. Silverentand (red.), Hoofdlijnen Wft, Deventer: Kluwer 2010, p. 91-92.

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4.1.2

Properness

The second requirement can be found under article 3:9 FSA. It states that the policy has to be determined by persons whose properness is beyond doubt. Based on this article, the insurance company can be held liable if the policy maker’s properness has not been beyond doubt. As mentioned before, the policy makers are mostly the Directors. Because this rule stretches out towards the co-policy makers, it is of importance for those in the Supervisory Board. Just as article 3:8 FSA, this article has been formulated in a way whereby also others who influence the insurance company fall within the scope of this article. A frequently used example is the majority shareholder who intensively interferes with the policy.122 However, it should be added that generally shareholders are not seen as a sort of policy makers. This is different when the shareholder is a qualified shareholder.123

A person is qualified as proper if he refrains from behaviour that could stand in his way to fulfil his job or his future job. The qualities will be checked before the person acquires the position by the DCB. The Central Bank has to act in accordance with the policy rules on properness testing.124 According to article 1 under 2 of those policies, behaviour that demonstrates the absence of qualities such as truthfulness, sense of responsibility, legislative loyalty, openness, sincerity, prudence, punctuality, integrity, discretion and righteousness is the type of behaviour the (co-)policy maker should refrain from. If one or more of these behaviours are absent, the properness of that person is no longer beyond doubt. Thus, the DCB will decide that the person under supervision cannot be hired.

The assessment of properness is conducted based on the intentions, actions and antecedents of the person under examination (article 2 under 1 of the policy rules on properness testing). The

122

Boshuizen & Jager, T&C Verzekeringsrecht, Betrouwbaarheid beleidsbepalers bij: Wet op het financieel toezicht, artikel 3:9 Wft; see also F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 434-435. 123 L. Silverentand (red.), Hoofdlijnen Wft, Deventer: Kluwer 2010, p. 93-94. 124 Policies relevant to properness testing of (candidate) (co-) policymakers and holders of qualifying holdings in supervised settings ( ‘beleidsregels inzake de betrouwbaarheidstoetsing van (kandidaat) (mede) beleidsbepalers en houders van gekwalificeerde deelnemingen in onder toezicht staande instellingen’ in Dutch).

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following is taken into account in the assessment: criminal records, financial antecedents, supervisory antecedents, fiscal public law antecedents and other antecedents (article 2 under 2 of the policy rules on properness testing).

The properness of a person is in principle only checked once. Deviation from this rule is only possible if the DCB has reason to believe that after the first check new antecedents took place.125This means that once a person is hired by insurance company ‘One’, that person will not be checked again when he applies for a job at insurance company ‘Two’. Whenever forms of the DCB have not been filled in correctly, this result in an antecedent and the properness of that person is no longer beyond doubt.126

4.1.3

Policy on the sound conduct of business

According to article 2:31 under 1 paragraph c FSA, the DCB shall grant a license if the applicant complies with (amongst others) article 3:10 subsection 1 and 2. This article states that insurers with its registered office in the Netherlands must pursue an adequate policy that safeguards the controlled and sound business operations. This means that certain measures have to be taken in order to prevent; conflicts of interest, the financial enterprise or its employees from committing offences or other transgressions of the law that could damage confidence in the financial enterprise or in the financial markets, prevent confidence in the financial enterprise or in the financial markets from being damaged because of its clients and to prevent the financial enterprise or its employees from performing other acts that are so contrary to generally accepted standards as to seriously damage confidence in the financial enterprise or in the financial markets.

A sound conduct of business became a control objective under the update and harmonization financial supervisions acts Act (‘Wet actualisering en harmonisatie financiële toezichtwetten’ in

125

F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 434-435. 126 Boshuizen & Jager, T&C Verzekeringsrecht, Betrouwbaarheid beleidsbepalers bij: Wet op het financieel toezicht, artikel 3:9 Wft.

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Dutch).127 Under this Act, financial undertakings are obliged to have a sound business and this must be integrated in the organization of the undertaking.128 The DCB also sees guarding sound business as one of its main strategic goals.129

The aim of article 3:10 FSA is that the insurer has to develop a policy itself and it has to provide for awareness, fostering and the enforcement of the principles laid down in this policy.130 Thus, in principle the insurance company is free in creating such a policy. However, subsection two of the article makes clear that minimum requirements for the policy can be laid down by or pursuant to a Decree. Those requirements can be found under article 10 of the Decree on Prudential Rules under the FSA (‘Besluit prudentiële regels Wft’ in Dutch). These requirements are based on the Deming-circle. Also mentioned the ‘Plan-do-check-act’. It states under paragraph one of article 10 of the Decree that the insurance company firstly has to systematically analyze the risks endangering a sound conduct of business. With this acquired knowledge, policy can be formed (the plan, see article 10 subsection 2). This policy has to be captured in procedures and measures (do, see also subsection 2). The insurance company has to inform all relevant businesses of the policies, procedures and measures (subsection 3). The policy, procedures and measures have to be checked regularly according to subsection 4 of the Decree. Paragraph 5 and 6 make clear that shortcomings have to be reported to the complianceofficer who has to alter the policy (act).131 When such a system is in place, another requirement for the insurance license is accomplished.

127

Kamerstukken II 2001/02, 28 373, nr. 3, paragraphs 3.1 and 3.2. F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 435. 129 Brochure Visie DNB toezicht 2006-2010. 130 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 436; see also Boshuizen & Jager, T&C Verzekeringsrecht, Integere bedrijfsuitoefening bij: Wet op het financieel toezicht, artikel 3:10 Wft. 131 Boshuizen & Jager, T&C Verzekeringsrecht, Integere bedrijfsuitoefening bij: Wet op het financieel toezicht, artikel 3:10 Wft.

128

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4.1.4

Minimum number of persons determining the day-to-day policy and the place from which they perform their activities

In order to receive a license, an insurance company has to comply with article 3:15 subsection one and two FSA (article 2:31 under 1 paragraph d FSA). Subsection one states that at least two natural persons have to determine the day-to-day policy of an insurer with its registered office in the Netherlands. This is also called the four-eye-principle or the principle of two-headed daily management. The aim of subsection one is safeguarding the quality and continuity of the business performance and its service. After acquiring the insurance license, the insurance company has to keep two persons to determine the day-to-day policy. This means that whenever one of the two persons is absent, the insurance company has to provide for substitution.132 The persons who determine the day-to-day policy are the directors. However, also persons who are no directors can influence that policy. Therefore, the article speaks of persons determining the day-to-day policy instead of directors. By those wordings other persons fall within the scope of this article.133

Subsection two makes clear where the insurance company performs its activities. It states that the persons who are determining the day-to-day policy of the insurance company shall perform those activities from the Netherlands. Because of the BCCI Directive134 this had to be inserted. Based on the Directive the central management of an insurance company has to be located in the Member State with the registered office. The managing Board falls under the wording ‘central management’.135 Therefore, directors have to perform their activities from the

132

Kamerstukken II 2004/05, 29 708, nr. 10. p. 241 (NvW); see also De Jong, T&C Verzekeringsrecht, Dagelijks beleid bij: Wet op het financieel toezicht, artikel 3:15 Wft and F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 437. 133 Kamerstukken II 2004/2005, 29 708, nr. 10, p. 238 (NvW); see also De Jong, T&C Verzekeringsrecht, Dagelijks beleid bij: Wet op het financieel toezicht, artikel 3:15 Wft. 134 European Parliament and Council Directive 95/26/EC of 29 June 1995 amending Directives 77/780/EEC and 89/646/EEC in the field of credit institutions, Directives 73/239/EEC and 92/49/EEC in the field of nonlife insurance, Directives 79/267/EEC and 92/96/EEC in the field of life assurance, Directive 93/22/EEC in the field of investment firms and Directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (Ucits), with a view to reinforcing prudential supervision. 135 De Jong, T&C Verzekeringsrecht, Dagelijks beleid bij: Wet op het financieel toezicht, artikel 3:15 Wft.

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Netherlands if the registered office of the insurance company is in the Netherlands. No deviation from this rule is possible.136

4.1.5

Control structure

Group structures can be complicated and therefore difficult to supervise. As an example the Bank of Credit and Commerce International (BCCI) had establishments in over 78 different countries. Amongst them were some of the central registered offices in Europe. Supervision was difficult if not impossible because of the non-transparent organized group. Eventually, the BCCI collapsed in 1991. As a reaction the European Union created the previously mentioned BCCI Directive. This Directive decreased the possibilities to have complex structures which make it difficult to supervise the group.137 More precisely, article 3:16 FSA implements article 2 paragraph 2 of the BCCI Directive. Thereto it states under paragraph one that an insurer with its registered office in the Netherlands shall not be affiliated to persons in a formal or actual control structure which is so lacking in transparency that it constitutes or may constitute an impediment to the adequate exercise of supervision of that financial enterprise. Where the Directive spoke of ‘close links’, article 3:16 uses the phrase ‘formal or actual control structure’. By these wordings it becomes clear that a broader definition of a group is used than under article 2:24b DCC.138 This describes a group as ‘an economic unit in which legal persons and partnerships are united in one organization’. What is meant by the phrase ‘formal or actual control structure’ is the following: It is about formal and factual relations between the financial undertaking and the corporation or natural person. In this view, under actual control structure should be understood an interwoven organizational structure as a result of which control is practiced in another way than anticipated based on the legal structure of the group.139

136

F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 438. 137 Kamerstukken II 2004/05, 29 708, nr. 10, p. 241-242 (NvW); see also E.P.M. Joosen, GS Toezicht Financiële Markten, commentaar op artikel 3:16 Wft. 138 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 438-439; see also De Jong, T&C Verzekeringsrecht, Ondoorzichtige zeggenschapstructuur bij: Wet op het financieel toezicht, artikel 3:16 Wft. 139 E.P.M. Joosen, GS Toezicht Financiële Markten, commentaar op artikel 3:16 Wft; see also De Jong, T&C Verzekeringsrecht, Ondoorzichtige zeggenschapstructuur bij: Wet op het financieel toezicht, artikel 3:16 Wft.

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Subsection two of article 3:16 FSA states that the insurer shall not be affiliated to persons in a formal or actual control structure if the law of a non-Member State, applicable to those persons, constitutes or may constitute an impediment to the adequate exercise of supervision of that financial enterprise. Whenever the insurance company fulfils the obligations of subsection one and two, another requirement in order to obtain a license has been fulfilled. Shortly, the insurance company has to make sure that it is not in any formal or actual control structure which makes supervision difficult.

4.1.6

Operational structure

Also the operational structure of an insurance company is bound by rules. Thereto article 3:17 paragraph one FSA states that an insurer with its registered office in the Netherlands shall organize its operations in such a way as to safeguard controlled and sound business operations. Operations can be split into the following aspects: general aspects (these are not specifically prudential or specifically behavioural), properness aspects, prudential aspects (these aim at improving the solidarity of the insurance company) and behavioural aspects (these aim at the orderly and transparent financial market processes, clear relationships between parties and the careful handling of clients).140 Having a solid operation is in principle the responsibility and in the interest of the insurance company itself. Therefore, article 3:17 uses the principle based approach. It is of importance that the insurer makes its own risk analysis and adjusts its operations likewise. The general thought is thus that the insurer has to be able to create its own measures for the risks it has to deal with. Another point made is that when adequate operations are in place supervision comes with less effort for the DCB. Because then reliable rapports will be the outcome.141

140

Kamerstukken II 2004/05, 29 708, nr. 10, p. 243 (NvW); see also De Jong, T&C Verzekeringsrecht, Beheerste en integer bedrijfsuitoefening bij: Wet op het financieel toezicht, artikel 3:17 and F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 440. 141 Kamerstukken II 2004/05, 29 708, nr. 10, p. 243 (NvW); see also De Jong, T&C Verzekeringsrecht, Beheerste en integer bedrijfsuitoefening bij: Wet op het financieel toezicht, artikel 3:17 and F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 440.

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It is required from insurers to organize their business in such a way that a controlled and sound business operation is guaranteed. A controlled operation includes managing the entire process of establishing, controlling, monitoring and adjusting objectives and processes. The insurer should include a clear organizational structure and clear reporting lines in order to control its business processes.142 Additional rules on controlled and sound business operations shall be laid down by or pursuant to a Decree, according to subsection two of article 3:17 FSA. Subsection two also mentions what should be in a Decree. Those rules shall concern: a control of business process and business risks, integrity (i.e. the prevention of conflicts of interest, offences or other transgressions of the law committed by the insurer or its employees that could damage confidence, relations with clients that could damage confidence and other acts performed by the insurer or its employees that are so contrary to generally accepted standards as to seriously damage confidence), soundness of the financial enterprise (i.e. control of: financial risks, other risks that may affect the soundness) and ensuring the maintenance of the required financial safeguards and other matters, to be specified in a Decree). The Decree in which all these more specified rules can be found is the Decree on Prudential Rules under the FSA (‘Besluit prudentiële regels Wft’ in Dutch). This Decree also gives rules on the further explanation of article 3:10 FSA (as we have seen before). Further rules on the integrity can be found under article 11 to 14 of the Decree. For the control of business processes and business risks paragraph 4.1 of the Decree is of importance. According to article 17, for the control of business process a clear organizational structure, a clear division of tasks, qualifications and responsibilities, an adequate capture of rights and duties, clear reporting lines and an adequate system for information and communication. Finally, section 4.2 of the Decree is of importance for the soundness of the financial enterprise. Dealing with relevant risks is the main objective for this part. In other words, adequate procedures and measures have to be in place in order to handle the risks in place. These risks can be financial risks or other risks. Examples of financial risks are market risks, credit risks and liquidity risks. Other risks can be legal risks, as an illustration; guaranties cannot be enforced because of the legal structure in place. The risk management has to be organized in a manner that ensures that the overall risk profile of the

142

Kamerstukken II 2004/05, 29 708, nr. 10, p. 243 (NvW); see also De Jong, T&C Verzekeringsrecht, Beheerste en integer bedrijfsuitoefening bij: Wet op het financieel toezicht, artikel 3:17.

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insurance company is in proportion to its financial resources. The aim of the risk management has to be ensuring adequate capitalization for the ongoing insurance company.143

Taking it all together, also to safeguard controlled and sound business operations the Demingcircle is used. When the insurance company has an adequate system in place, another requirement for obtaining an insurance license has been fulfilled.

4.1.7

Minimum number of members of the Supervisory Board

The seventh requirement in order to obtain an insurance license can be found under article 3:19 under one FSA. It states that an insurer with its registered office in the Netherlands, that is a public limited company or a European company shall have a supervisory board as referred to in articles 140 and 250 respectively of Book 2 DCC, composed of at least three members.144 From these articles of the DCC becomes clear that the task of the Supervisory Board is supervision of the policies of the management and the general course of affairs of the insurance company and the enterprises connected therewith. Besides supervising, the Supervisory Board gives advice to the Board of Directors. When fulfilling its tasks, the Supervisory Board acts in the interest of the insurance company and its affiliated businesses. Regarding the designation of a member of the Supervisory Board, only natural persons can be assigned. Members are not appointed for the protection of specific interest such as employees, shareholder or third parties and members cannot be bound by instructions or mandates.145 Members of the Supervisory Board are nominated by the deed of incorporation or appointed by the general meeting of shareholders (see article 2:142 and 2:252 DCC).

Concluding, the Supervisory Board of the insurance company should consist of at least three members in order to obtain a license ex article 2:31 FSA.

143

Kamerstukken II 2004/05, 29 708, nr. 10, p. 244-245 (NvW); see also De Jong, T&C Verzekeringsrecht, Beheerste en integer bedrijfsuitoefening bij: Wet op het financieel toezicht, artikel 3:17. 144 B.M. van Beek e.a., GS Toezicht Financiële Markten, commentaar op artikel 3:19 Wft. 145 De Jong, T&C Verzekeringsrecht, Raad van commissarissen bij: Wet op het financieel toezicht, artikel 3:19.

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4.1.8

Legal form

With the view to obtain a license, the insurance company must act in accordance with article 3:20 FSA (according to article 2:31 FSA). Article 3:20 provides the legal forms an insurance company can have. It states that the insurer with its registered office in the Netherlands shall have the legal form of a public limited company, mutual association or European company.

4.1.9

Minimum equity capital

The ninth requirement for obtaining an insurance license of article 2:31 FSA relates to the minimum equity capital. The rule is laid down under article 3:53 FSA. It states under paragraph one that an insurer with its registered office in the Netherlands shall have a minimum amount of equity capital at its disposal. Without prejudice from paragraph one, paragraph two states that an insurer shall have sufficient financial resources at its disposal to cover the costs of administrative procedures and the production network. As appears from paragraph four the minimum amount of equity capital shall be expressed as the minimum amount of the guarantee fund. Whenever an insurer enters the market (for the first time) the minimum amount of equity capital shall be equal to the minimum amount of the guarantee fund. Whenever an insurer enters another branch (not the first time) the minimum amount shall be equal to the minimum amount of the solvency margin. An insurance company thus has to have a minimum amount of the guarantee fund and, in addition, it needs to have sufficient resources to cover the costs of administrative procedures and the production network.146 Further rules on these matters can be found in a Decree. Once more, these rules are laid down under the Decree on Prudential Rules under the FSA, Chapter 9 (concerning minimum capital).

The relevant insurance company, i.e. the non-life insurance company, must have a minimum guarantee fund of 2,3 or 3,5 million Euros. When the insurer insures in the branch of motor vehicle liability, road transport liability, aircraft liability, ship liability or general liability 3,5 million Euros have to be in the guarantee fund. For all other non-life insurers 2,3 million Euros is

146

F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 458.

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the minimum.147 The minimum guarantee fund is created by the value of the assets of the insurance company. Which assets can be taken into account can be found in article 52 of the Decree.

The insurance company has to notify the DCB when it does not meet the requirements of the minimum guarantee fund according to article 3:37 subsection 5 in conjunctions with subsection 2 and 4 FSA.

Unlike other requirements, the DCB cannot grant relief from the minimum equity capital requirement. See subsection six of article 3:53 FSA.148

4.1.10 Solvency

In addition to the minimum equity capital requirement, an insurance company has to be solvent. This is the tenth condition of article 2:31 FSA in order to obtain an insurance licence. To fulfil this obligation, article 3:57 subsections one to four have to be met. Subsection one states that an insurer with its registered office in the Netherlands must be sufficiently solvent. The aim of the solvency-requirement is creating financial back-up in the event of a financial downturn.149 Subsection three states that the solvency to be maintained by an insurer shall be expressed as a solvency margin. And, according to subsection four, the guarantee fund shall constitute one third part of the minimum solvency margin. This guarantee fund is of importance because when the solvency margin drops below the guarantee fund, the DCB shall submit a financial plan. In such a situation, the present guarantee fund (article 3:57 paragraph 4 FSA) differs from the minimum guarantee fund (article 3:53 FSA). Whenever the solvency margin goes below the required solvency margin, the DCB shall submit a remediation plan. The difference between these two reactions of the DCB is the available time. When using the financial plan, less time is

147

See article 49 subsection 1 paragraph f and g of the Decree on Prudential Rules under the FSA. F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 459; see also Boshuizen & Jager, T&C Verzekeringsrecht, Minimumbedrag van het garantiefonds bij: Wet op het financieel toezicht, artikel 3:53. 149 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 462; see also Boshuizen & Jager, T&C Verzekeringsrecht, Solvabiliteit en garantiefonds bij: Wet op het financieel toezicht, artikel 3:57.

148

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given.150 The height of the solvency margin can be found in a Decree (subsection two). This information can be found under Chapter 10 (concerning solvency) of the Decree on Prudential Rules under the FSA. Paragraph 10.1 gives detailed information on the required minimum solvability. Article 67 of the Decree gives rules on the minimum solvency margin of a non-life insurer. Depending on certain variable, the minimum amount is set. Paragraph 10.6 regulates which assets can be taken into account for the solvency margin. These assets are, amongst others, paid-up capital, reserves and undistributed profits.151

According to article 59 of the Decree, solvency is sufficient when the solvency margin in place is at least equal to the required solvency margin. In reality, the solvency margin in place exceeds the one required. The solvency ratio (present solvency margin divided by the required solvency margin) thus has to be equal to or above 100 percent.152

4.1.11 Financial year

According to article 2:31 FSA the eleventh (and the final one under paragraph one) requirement for a licence is article 3:70 subsection one FSA, with regard to the financial year. Thereto article 3:70 states that the financial year of an insurer with its registered office in the Netherlands shall coincide with the calendar year. The idea behind it was that such a requirement is necessary to compare several enterprises.153

4.1.12 Composition

As for the composition of the insurance company the Supervision Act states under article 2:28 that a party licensed to conduct the business of a life insurer shall not be licensed to conduct the

150

Boshuizen & Jager, T&C Verzekeringsrecht, Solvabiliteit en garantiefonds bij: Wet op het financieel toezicht, artikel 3:57. 151 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 463. 152 Boshuizen & Jager, T&C Verzekeringsrecht, Solvabiliteit en garantiefonds bij: Wet op het financieel toezicht, artikel 3:57. 153 Wet op het levensverzekeringsbedrijf, Wet van 22 december 1922, Stb. 716; see also Boshuis & Jager, T&C Verzekeringsrecht, Boekjaar gelijk aan kalenderjaar bij: Wet op het financieel toezicht, artikel 3:70.

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business of a non-life insurer (subsection one). For the other way around the same is true; a party licensed to conduct the business of a non-life insurer shall not be licensed to conduct the business of a life insurer (subsection two). The reason for this composition ban (‘compositieverbod’ in Dutch) is twofold. Firstly, it is undesirable that unequal risks originating from direct insurance and reinsurance are mixed together. Secondly, the required expertise for one class of risk does not necessarily reflect the expertise required for the risks originating from the other insurance branch.154

4.1.13 Subsection two: qualified shareholder

Subsection two of article 2:31 FSA gives additional requirements when the license application is for an insurer in which a qualified shareholding is owned. There is a qualified shareholder when a shareholder owns 10% or more in the insurance company (article 1:1 FSA).155 This will be the case for the single-parent captive as its 100% parent will generally start the procedure of creating a captive. In order to make an adequate comparison between the captive and the insurance company, the requirements will be addressed of both forms.

The license shall only be given after the qualified shareholder applied for a declaration of no objection and the supervisor believes that the declaration can be granted. It is thus not required that the declaration of no objection has been granted. The DCB shall only grant a license when the applier acts in accordance with article 3:95 paragraph 2 FSA and the Bank has the opinion that the applier complies with the declaration of no objection (See Exhibit B). From article 3:95 FSA becomes clear that no insurance license shall be given when a declaration of no objection is absent when there is a qualified shareholder. In order to obtain such a declaration the applier has to turn to the DCB or the AFM. Normally, only the DCB can be approached. However, when the financial enterprise does not hold a licence when applying for the declaration, it can go to the AFM as well (see paragraph two of article 3:95 FSA). Although both supervisors can be

154

Kamerstukken II, 2007/2008, 31 131, nr. 6, p. 3-5 (NvW). C.M. Grundmann-van de Krol, Koersen door de Wet op het financieel toezicht, Den Haag: Boom Juridische uitgevers 2010, p.118-120; see also aricle 92 of the Directive 2001/34/EC of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities. 155

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addressed, only one will deal with the matter. The authorized supervisor is the one of the Member State in which the holding company of the (future) insurance company is situated.156 This will be the DCB. Whenever the FSA is turned to first, the FSA sends the request to the DCB. The DCB checks whether it must grant a license or not. In either situation it sends its conclusion to the FSA. Then, the FSA sends it to the applicant.157

When there has been applied for the declaration of no objection a non-opposition procedure starts. This is a procedure to simplify exemption. When no objections rose to a notified agreement within a defined period, there is no exemption. For this specific non-opposition procedure the objection period is three months. In these three months the authorities can object. However, this is only possible given the need to ensure sound and prudent management of the insurance company. When no objection(s) rose, the declaration of no objection shall be granted.158

In addition to the requirements of article 3:95 FSA the DCB needs to have the opinion that article 3:100 FSA regarding the declaration of no objection is complied with. Article 100 FSA contains exhaustive refusal grounds. One of them is that the properness of the applicant that might (or would) determine or co-determine the policy of the enterprise concerned, must be beyond doubt.159 In addition, the persons determining the day-to-day policy must be experts (as was required under article 3:8 FSA). Another refusal ground is that the financial solidarity of the applicant must be guaranteed. In addition, the applicant has to comply with the prudential rules of the FSA. And there must not be reasonable grounds to suspect that in order to acquire or increase financial means money laundry or terrorist financing practices are or were done or were attempted. Finally, the applicant must not have provided incomplete or inaccurate information. Also article 3:102 is of importance. Without this article, new application for the declaration of no objection has to be made when the percentage of the shares increase or

156

Kamerstukken II 2009/10, 32 292, nr. 3, p. 12-12. Borgesius, T&C Verzekeringsrecht, Algemeen verbod van gekwalificeerde deelnemingen bij: Wet op het financieel toezicht, Artikel 3:95. 158 F.G.B. Graaf & R.A. Stegeman (red.), Wet en het financieel toezicht: Tekst & toelichting, Deventer: Kluwer 2007, p 488-489. 159 This used to be in the FSA under article 99, but nowadays it can be found under article 100 paragraph one. See Kamerstukken II 2009/10, 32 393, nr. 3, p. 16. 157

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decrease. This becomes clear out of subsection one of article 3:95 FSA. When applying for article 3:102 FSA the received declaration of no objection has a broader range. Then, the minimum is 10 % and the maximum is when the qualified shareholder owns 20, 33, 50 or 100 percent of the shares.160 Thus, when the amount of shares stays between 10 and 20, no new application is required. There is, however, a duty to notify when the following percentages are reached (by increase or decrease): 20, 33, 50 and 95 percent. A broad declaration can be between certain percentages. It can be between 10-50 percent or even 10-100 percent. When it is between 10 and 50 percent notification is required when the 20 and 33 percent levels are passed. The duty to notify when 95 percent has been reached has been inserted because in such situation the 95 percent shareholder can start a procedure in which the remaining 5 percent have to sell their shares (article 2:92a and 2:201a DCC). By this rule, supervisors are aware of the (possible) acquirements.161 Article 3:102 also offers the possibility for the declaration of no objection to be accepted for the entire conglomerate. When inside a group of connected corporations a restructure is organized, new application for a declaration is not necessary.162

Normally the supervisor has to make a decision on the license application within 13 weeks (article 1:102 subsection 3). However, when there was also applied for a declaration of no objection this period is stretched out to the maximum of six weeks after the decision of the declaration of no objection (article 1:103 subsection 1).163

4.1.14 Subsection three: required information

Subsection three of article 2:31 FSA states that the license application must state the sector(s) for which the license is requested and containing the data to be specified by or pursuant to a Decree. This information is laid down in the Decree on market access of financial corporations 160

Kamerstukken II 2009/10, 32 292, nr. 3, p. 15; see also Borgesius, T&C Verzekeringsrecht, Algemeen verbod van gekwalificeerde deelnemingen bij: Wet op het financieel toezicht, Artikel 3:95. 161 Kamerstukken II 2004/05, 29 708, nr. 10, p. 286-287 (NvW); see also Borgesius, T&C Verzekeringsrecht, Verveelvoudiging vvgb bij: Wet op het financieel toezicht, Artikel 3:102. 162 Kamerstukken II 2004/05, 29 708, nr. 10, p. 287 (NvW); see also Borgesius, T&C Verzekeringsrecht, Verveelvoudiging vvgb bij: Wet op het financieel toezicht, Artikel 3:102. 163 Borgesius, T&C Verzekeringsrecht, Algemeen verbod van gekwalificeerde deelnemingen bij: Wet op het financieel toezicht, Artikel 3:95; see also Boshuis & Jager, T&C Verzekeringsrecht, Vergunningeisen levens- of schadeverzekeraar bij: Wet of het financieel toezicht, Artikel 2:31.

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FSA (‘Besluit Markttoegang financiële ondernemingen Wft’ in Dutch). More precisely, for the non-life insurer articles 12 and 14 of this Decree are of importance. The required data are: the name, address and telephone and fax number of the insurer; the legal form of the insurer; the registered office, registered trade name and the name(s) used on the market; the number of commercial registration(s) and a certified copy of the statutes; a program of activities which the insurer intends to perform; data concerning the expertise of the day-to-day policy makers; data on the properness of the (co-)policymakers; description of the proposed policy with regard to the sound operations, the control structure and the operational structure with respect to the controlled and sound operations; documents showing the equity and the expected solvency status; and if there is a qualified shareholder, the extent of its participation including expertise and properness information of the persons involved and documents showing the financial position and the legal group structure of the applicant (or holder) of the declaration of no objection.164

4.1.15 Subsection four: dispensation

Subsection four of article 2:31 FSA concerns possible dispensation. From this article, it becomes clear that the DCB may grant a full or partial dispensation from some requirements under paragraph one if the applicant demonstrates that it cannot reasonably comply with those provisions and that the objectives of these requirements are achieved in other ways. The DCB can offer (partial) dispensation from the policy on the sound conduct of business, the minimum number of persons determining the day-to-day policy and the place from which they perform their activities, the operational structure, minimum members of the Supervisory Board and the requirements on the financial year. As for the other requirements, the DCB cannot offer any form of relief. To be entitled for dispensation two cumulative conditions have to be met. Firstly, the applicant cannot reasonably (or not in time) fulfil the requirement. Secondly, the purpose of the requirement is achieved in another way. Only when both conditions have been met, the DCB

164

Boshuis & Jager, T&C Verzekeringsrecht, Vergunningeisen levens- of schadeverzekeraar bij: Wet of het financieel toezicht, Artikel 2:31.

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can offer dispensation. In addition, the burden of proof with respect to both of the requirements lie with the applicant and the dispensation will only be temporary.165

4.2 License requirements for the captive insurance company

The captive insurance company is not mentioned by its name under the Financial Supervision Act. However, also captive insurance companies are subject to supervision under the Financial Supervision Act.166 This seems like an extreme burden because of the relatively seen small size of compared to the conventional insurance company. However, according to E. Bloem this is a relative small burden as a captive rarely or never offers a complete insurance solution. A complete solution is obtained by the use of conventional insurance companies. A wellfunctioning insurance market is therefore of importance for corporations with a captive (or captives). Sufficient supervision can contribute to a well-functioning insurance market. In addition, the recent financial crisis shows how important supervision is.167

As for the Financial Supervision Act, captives are treated as if they are a conventional insurance company. The requirements for a captive can thus also be found under article 2:31 FSA. Because the requirements under the FSA are the same for a captive and an insurance company, only the deviating points will be addressed shortly below.

4.2.1

Policy on the sound conduct of business

A captive must pursue an adequate policy that safeguards the controlled and sound business operations ex article 3:10 under one and two FSA. Such a policy has to be in accordance with article 10 of the Decree on Prudential Rules under the FSA. Simply stated, policy has to be

165

Boshuis & Jager, T&C Verzekeringsrecht, Vergunningeisen levens- of schadeverzekeraar bij: Wet of het financieel toezicht, Artikel 2:31. 166 ‘Captive: klem tussen wet en doelgroep: Kan het toezicht eenvoudiger?’, NARIM (Nederlandse Associatie van Risk en Insurance Managers) november 2009, www.narim.com/userfiles/File/vakgroep_captives.pdf; see also E. Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 18-21. 167 E. Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 18.

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created by using the Deming-circle.168 This means that a captive is (as the insurance company) able to create its own policy on the sound conduct of business. In other words, the captive has to analyze its risks regarding the sound conduct of business. Based on the analysis policy has to be created. This policy is realized through procedures and measures. Because of the fact that a captive only insures risks originating from the group where it is a part from, it can be argued that the risks endangering the sound conduct of business are compared to the conventional insurance company low. As a consequence, the policy does not need to live up to the same standards as for an insurance company. In addition, one of the focuses of the FIRM (used by the DCB) is the sound conduct of business. This means that of each insurance company or captive an image is created on the soundness of the conduct of business.169 The FIRM has a risk-based approach. Because of this the risks are taken into account. This means that a captive has to deal with fewer risks regarding the sound conduct of business and thus the requirements under the FIRM for the policy in place are lower.

4.2.2

Control structure

Also the captive has to make sure that it is not in any formal or actual control structure which makes supervision difficult. As for the supervision by the FIRM the DCB decomposes the group structure in order to obtain a clear view on the structure. By the decomposition the licensed institutions have to be visible. This is thus true for the (re)insurance company and the (reinsurance) captive.170

4.2.3

Operational structure

A captive needs to have an operational structure in place that safeguards controlled and sound business operations ex article 3:17 FSA. The captive has to create its own structure by taking its own risk analysis into account (also the Deming-circle). However, the captive is not entirely free; what should be regulated can be found under Chapter 4 of the Decree on Prudential Rules

168

For more information, see paragraph 4.1.3. Paragraph 2.3.4. of the FIRM manual of November 2005 (under Chapter two: Introduction to FIRM). 170 Paragraph 3.1.1.-3.2.7. of the FIRM manual of November 2005 (under Chapter three: Decomposition of the organization). 169

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under the FSA. The same aspects are taken into account as for the insurance company. However, a captive does not have to deal with some risks the insurance company has to cope with. For example, the clear relationship between parties and the careful handling of clients is of less importance as the captive only has one client: members of its own group. Because of this the required operational structure differs from the one required by the insurance company. The FIRM analyzes the probability a certain risk realizes and the height of the impact. When the probability or impact is bigger, supervision increases. The insurance risks mentioned in the FIRM manual are death, disability of employees, damage and concentration and correlation. However, when the chance that damage materializes increases a captive will earlier be aware than an insurance company will. Because a captive is part of the group it insures there are few layers. As a consequence, a captive can alter its policy more quickly. This results in a better riskanticipation. This leads to the view that supervision for a captive on this matter will be less intense.

However, it could be argued that risks for captives are higher as the risk diversification is lower than for a conventional insurance company. Of course, a captive’s portfolio is not equal the amount of risks covered by an insurance company, but the diversity of the risks can even outreach the diversity of insurance companies. As an example massive industrial complexes exist of different buildings with different functions. What at the first sight seems like one establishment can consist of diversified risks. In addition, when the captive is owned by a multinational company other risks originating outside the Netherlands can be covered. Think of earthquakes, tsunamis, political risks or terrorism. Finally, a captive can use longer periods of time than is possible on the conventional insurance market. Because of this, captives are less sensitive for changes on the market.171 Captives thus can have a diversified portfolio. Therefore the previous point of view remains the same.

171

E. Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 20.

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4.2.4

Legal form

A captive can have the legal form of a public limited company, mutual association or European company (article 3:20 FSA). The public limited company is generally used in the Netherlands for a captive.

4.2.5

Solvency

The same calculation is used as for the insurance company.172 This is because external business partners would like to have some certainties, the minimum solvency requirement offers them such securities.173 Therefore, the same calculation is used as for the conventional insurance company. However, when the variables differ, so does the minimum solvency margin. According to the FIRM manual the DCB has two options to deal with the solvency of a captive. Firstly it can supervise the solvency of the captive itself. Or secondly, it can choose for the central part of the group that focuses on solvency management. The one the DCB chooses depends on the structure of the group.174

4.2.6

Subsection two: qualified shareholder

Because the type of captive focussed on is the single-parent captive, a qualified shareholder exists. As more than 10 percent (as for the captive: 100 percent) of the shares is owned by one shareholder. As a consequence the parent of the captive has to apply for a declaration of no objection (article 3:95 FSA).175

172

See paragraph 4.1.10. E. Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 19. 174 Paragraph 3.2.5 of the FIRM manual of November 2005 (under Chapter three: Decomposition of the organization). 175 See paragraph 4.1.13 for additional information. 173

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4.2.7

Subsection four: dispensation

For some requirements the DCB can offer (partial) dispensation (article 2:31 subsection four FSA). Dispensation can be given for the policy on the sound conduct of business, the minimum number of persons determining the day-to-day policy and the place from which they perform their activities, the operational structure, minimum members of the Supervisory Board and the requirements on the financial year. In order to be entitled for dispensation the following conditions have to be met. Firstly, the applicant cannot reasonably (or not in time) fulfil the requirement. And secondly, the purpose of the requirement is achieved in another way. These two requirements can be more easily met by the captive for the policy on the sound conduct of business and the operational structure. This is because the captive only insures risks of the group where it is a part from. Therefore, the policyholders (in this case the operating businesses) need less protection. In addition the captive has direct contact with its policyholders and because of that the captive can take measures when necessary. Because of these differences a captive will be more-likely to receive dispensation for a sound conduct of business and an operational structure. As for the other requirements dispensation is possible for, I believe the treatment will be equal to the insurance company.

4.2.8

Chapter 3.6 Financial Supervision Act

More interesting information on captives can be found under Chapter 3.6 of the Financial Supervision Act. This Chapter contains additional provisions regarding financial groups. More precisely, Section 3.6.3 about the supplementary supervision of reinsurers, life insurers and nonlife insurers in an insurance group is of importance. Article 3:282 paragraph 3 FSA states that supplementary supervision as referred to in articles 3:284 and 3:287 shall be exercised in respect of a Dutch reinsurer, life insurer or non-life insurer whose parent enterprise is a mixedactivity insurance holding company. What a mixed-activity insurance holding company is, can be found under article 3:268 subsection one under g. Then it becomes clear that it is a parent enterprise other than a mixed financial holding company, reinsurer, life insurer, non-life insurer or insurance holding company, and which has a subsidiary that is a reinsurer, life insurer or nonlife insurer having its registered office in a Member State. The captive insurance company here - 55 -

discussed is a single-parent captive whose focus lies at direct non-life insurance. This means that the captive is wholly owned by the holding company. The captive is set up in order to manage the risks within the group where it is a part from. Accordingly, it is highly unlikely that the holding company will be active on the insurance market. Because in such a situation the holding company would not need a captive as it can manage the risks already. The captive-group thus falls within the scope of article 3:282 FSA.176 As a consequence, the group needs to act in accordance with article 3:284 and 3:287 FSA.

Article 3:284 FSA states that the DCB shall include in its supervision the intra-group contracts and positions between the Dutch captives and the companies it is related to. Thereto, the captive has to report the DCB, in principle, once a year (according to article 5 subsection one of the Decree on prudential supervision financial groups FSA, ‘Besluit prudentieel toezicht financiële groepen Wft’ in Dutch). With intra-group contracts and positions is meant the contracts or positions that exceed a by the DCB decided threshold related to the required solvability. Before deciding that threshold, the DCB consults the captive.177 Based on subsection 3 of article 5 of the Decree, the DCB can take measures when it becomes clear from the intragroup contracts and positions that the solvency of the captive is jeopardized.

The other rule the group with a captive has to comply with is laid down under article 3:287 FSA. From this article becomes clear that the DCB shall demand information for the supervision of the captive in relation with the group firstly of the captive. Whenever the captive does not hand over the requested information the holding or subsidiaries of the holding have to give the information. This system of firstly addressing the captive itself and if it does not react adequately address others is based on the principle of solidarity.178

176

Boshuis & Jager, T&C Verzekeringsrecht, Aanvullend groepstoezicht bij: Wet of het financieel toezicht, Artikel 3:282. 177 See article 5 subsection two of the Decree on prudential supervision financial groups FSA. 178 Boshuizen & Jager, T&C Verzekeringsrecht, Reikwijdte inlichtenvordering bij: Wet op het financieel toezicht, Artikel 3:287.

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4.3 License requirements for the reinsurance company

Reinsurance companies have not always been subject to supervision. The primary reason for this was that the agreement was made between professional parties. Because of the professional relationship the protection of the policyholder was not at stake. And protection of the policyholder was the foremost function of supervision. However, this vision changed after certain events, such as natural disasters and terrorist activities. From these events it became clear that reinsurers could get in severe problems. As a result of which the direct insurers could be affected. Because of this connection, the interests of the policyholder are no longer protected. It is because of this reasoning that the reinsurers are now subject to supervision.179 In addition, the need for regulation was expressed by several authorities in the Financial Services Action Plan180 and by the International Monetary Fund and the International Association of Insurance Supervisors (IAIS).181 As a result, the European Reinsurance Directive182 was created. However, these changes do not stretch out over the entire Financial Supervision Act. For reinsurance companies the part of behavioural supervision is not of importance. According to the legislator, there was no need for the behavioural part being applicable on reinsurers because of the professional relationship between parties on the reinsurance market.183 This has been achieved by changing the definition of a financial product. A financial product is (amongst others) an insurance not being a reinsurance (article 1:1 FSA). Reinsurance is thus not a financial product and because of that a reinsurer is not a financial service provider. As a consequence, reinsurers fall outside the scope of article 4:1 FSA and behavioural supervision is not applicable for reinsurers.184

179

T&C Verzekeringsrecht, Inleidende opmerkingen bij: Wet op het financieel toezicht, Afdeling 2.2.2.A Uitoefening van bedrijf van herverzekeraar. 180 Commission Communication of 11 May 1999 entitled "Implementing the framework for financial markets: action plan" COM(1999) 232. 181 Directive 2005/68/EC of the European Parliament and of the Council of 16 November 2005 on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EC and 2002/83/EC, introduction under point 6. 182 Directive 2005/68/EC of the European Parliament and of the Council of 16 November 2005 on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EC and 2002/83/EC. 183 Kamerstukken II 2006/07, 31 131, nr. 3, p. 6 and 23 (MvT). 184 C.W.M. Lieverse, ‘Richtlijn Herverzekering: Toezicht op herverzekeraars en entiteiten voor risicoacceptatie’, Tijdschrift voor Financieel Recht 2007, Nr. 11/12, p. 338-339.

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Based on the European Reinsurance Directive, the Financial Supervision Act was altered. Regarding reinsurance companies, articles 2:26a to 2:26g FSA were created. For the requirements of obtaining a reinsurance license, articles 2:26a and 2:26b FSA are of importance.

Article 2:26a FSA states that in order to conduct the business of a reinsurer (with the registered office in the Netherlands) a license is required of the DCB. A new license is not required of a licensed direct insurer who is also active on the reinsurance market. Thus only one license is required.185 The next article (article 2:26b FSA; see Exhibit C) gives the requirements for obtaining a reinsurance license. As can be seen by comparing article 2:31 FSA with article 2:26b FSA the two articles are identical. However, this does not mean that all requirements are exactly the same. This is because of the lower legislation in which requirements obtain different interpretations. It is for this reason that the only deviating requirements and points of interest of article 2:26b shall be addressed in the following subparagraphs.

4.3.1

Minimum equity capital

Also for the reinsurance company minimum guarantee fund is required (article 3:53 FSA). Specialized rules can be found under Chapter 9 of the Decree on Prudential Rules under the FSA. The amount required for the reinsurance company deviates from the required amount of the insurance company. As we have seen 2,3 or 3,5 million Euros is the minimum guarantee fund for an insurance company and captive. However, as appears from article 49 subsection one under c of the Decree, 3 million Euros is required from a reinsurance company.

4.3.2

Solvency

Another requirement of article 2:26b FSA relates to the solvency of the reinsurance company. What has been addressed under paragraph 4.1.10 is also relevant here, except for the calculation of the minimum solvency margin. As mentioned before, article 67 of the Decree on

185

Boshuis & Jager, T&C Verzekeringsrecht, Vergunningplicht herverzekeraars met zetel in Nederland bij: Wet op het financieel toezicht, Artikel 2:26a.

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Prudential Rules under the FSA gives rules on the calculation of the minimum solvency margin for a non-life insurer. Regarding the reinsurance company, those rules are laid down under article 64c of the Decree. The wordings used for the basic calculation come down to the same. However, this does not mean that the height of the solvency margin will be equal. This is because of the variables that are used. These variables are the amount of damage on the own account after transfer under reinsurance or retrocession and the gross claims, both based on numbers of the last three years. Other variables are the premiums and costs of the previous year.186 By the use of these variables the exact heights of the minimum solvency margin are not the same. In addition, ceiling-numbers are used. This means that when the variables go above a certain number, the ceiling-number is exceeded. The consequence of this is that the minimum solvency margin increases. Thus if the (re)insurance company exceeds the ceiling-number, the solvency margin is higher. However, fact remains that the treatment of the insurance company and the reinsurance company on this matter is equal. This has been decided at the time of creating this legislation.187

4.3.3

Composition

A reinsurer may cover life and non-life risks contrarily to the direct insurance company. However, the situation changes when the reinsurer decides to cover risks directly, thus no longer only on the reinsurance market. When the reinsurer conducts the business of a life reinsurer, it shall not be granted a license to conduct the business of a direct non-life insurer (article 2:28 subsection 3 FSA). In addition, when a reinsurer is licensed to cover non-life risks no license shall be granted to conduct the business of a direct life insurer (article 2:28 subsection 4 FSA). The reasons for this composition ban are the same as for the insurance company.188

186

The minimum solvency margin is calculated as follows: it is a percentage times a number. The percentage depends on the amount of damage on the own account after transfer under reinsurance or retrocession related to the gross claims. The number depends on the premiums and costs of the previous year or on the average booked gross claims + average added loss provisions. 187 Kamerstukken II 2006/07, 31 131, nr. 3, p. 4 (MvT); see also the explanations of Articles 64a, 64b and 64c of the draft-Decree on Prudential Rules under the FSA. 188 See paragraph 4.1.12. See also Kamerstukken II, 2007/2008, 31 131, nr. 6, p. 3-5 (NvW).

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4.4 License requirements for the captive reinsurance company

These captive reinsurance companies are reinsurers who only reinsure risks originating from the group they are a part from.189 The European Reinsurance Directive is applicable for captive reinsurance companies as well.190 In addition, the Financial Supervision Act does not make a difference between the reinsurance company and the captive reinsurance company. Because of this, the behavioural part of the Financial Supervision Act is neither of importance for the captive reinsurance company. In addition, because no difference is made between the reinsurance company and the captive reinsurance company the same article is relevant for both of them: article 2:26b FSA. However, also here further details can be found in lower legislation. In that lower legislation the concrete requirements deviate. Because we are discussing the same article as under paragraph 4.3, only some points of interest and deviating rules shall be addressed.

4.4.1

Policy on the sound conduct of business

A reinsurance captive has to create its own policy on the sound conduct of business (ex article 3:10 FSA in correlation with article 10 of the Decree on Prudential Rules under the FSA).The policy has to be based on its own risk-analysis (the Deming-circle). As the reinsurance captive only reinsures risks which come from the group it is a part from. Therefore, confidence in the reinsurance captive or confidence in the financial market because of the captive is not easily damaged. In addition, for the reinsurance captive the sound conduct of business generally only affects the group internally. This means that the risks are different from those of an insurance company. Therefore, less is required of the policy. Regarding the FIRM, the same is true for a reinsurance captive as for a direct captive.191

189

C.W.M. Lieverse, ‘Richtlijn Herverzekering: Toezicht op herverzekeraars en entiteiten voor risicoacceptatie’, Tijdschrift voor Financieel Recht 2007, Nr. 11/12, p. 339. 190 Directive 2005/68/EC of the European Parliament and of the Council of 16 November 2005 on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EC and 2002/83/EC, introduction, point 11. 191 See paragraph 4.2.1.

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4.4.2

Operational structure

A reinsurance captive also needs to develop its own operational structure based on the Demingcircle (ex article 3:17 FSA in conjunction with Chapter four of the Decree on Prudential Rules under the FSA) as the (captive) insurance company and reinsurance company.192 However, a captive deals with other risks than a conventional (re)insurance company. Especially the risks related to clients. These risks are minimized in a captive as it only has customers originating from its own group. Therefore, risks are lower. In addition, the FRIM also takes risks into account in its analysis. In needs to be added that a captive can more easily anticipate when changes of materialization of the risks change. This leads to the view that supervision on reinsurance companies related to the operational structure is less intense.

4.4.3

Legal form and Supervisory Board

Also the captive reinsurance company has to act in accordance with article 3:20 FSA. It must have the legal form of a public limited liability company, mutual association or European company. Generally a public limited liability company is used. However, before the European Reinsurance Directive existed many captives had the legal form of a private limited liability company. In addition, a Supervisory Board with at least three members has to be in place (article 3:19 FSA). These requirements come with extra costs; firstly the costs for converting the legal form and secondly, the costs of checking the three (or more) members of the Supervisory Board. According to a writer, the benefits of these requirements do not become clear.193 However, it needs to be added that dispensation from the minimum number of members on the Supervisory Board is possible (article 2:26b subsection four FSA).

192

See paragraph 4.1.6 and 4.2.3 for the requirements. C.W.M. Lieverse, ‘Richtlijn Herverzekering: Toezicht op herverzekeraars en entiteiten voor risicoacceptatie’, Tijdschrift voor Financieel Recht 2007, Nr. 11/12, p. 338 and 340.

193

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4.4.4

Minimum equity capital

Also for the captive reinsurance company minimum a guarantee fund is required under article 3:53 FSA. However, article 49 subsection one under b of the Decree on Prudential Rules under the FSA makes clear that 1 million Euros is the minimum guarantee fund for a captive reinsurance company.194 This is less than required for the (re)insurance company.

4.4.5

Solvency

The captive reinsurance company has to fulfil the same solvency-requirements as the (re)insurance company.195 However, it needs to be added that the captive reinsurer only reinsures when it originates from its own group. This means that scope of the captive insurer is not as broad as a (re)insurer. As it is only related to a limited number of corporations. Because of this it can be stated that the variables (described under paragraph 4.3.2) will be lower for the captive reinsurer. Hence, the solvency-requirements for the captive reinsurer will be less than for the (re)insurance company.

4.4.6

Subsection two: qualified shareholder

When using a captive reinsurance captive company, a qualified shareholder is in place. This is clearly the case for the single-parent reinsurance captives. As then, 100 percent of the shares are held by the holding company. In such a case, application for a declaration of no objection is necessary. As mentioned before under paragraph 4.1.12 it is sufficient if the holding applies for the declaration and it is believed that it will receive it. It is thus unnecessary to have the declaration for obtaining a license. The declaration shall not be given if the sound and prudent management of the captive reinsurance company is no longer ensured. This means that an atarms-length control is required.

194

C.W.M. Lieverse, ‘Richtlijn Herverzekering: Toezicht op herverzekeraars en entiteiten voor risicoacceptatie’, Tijdschrift voor Financieel Recht 2007, Nr. 11/12, p. 338 and 340. 195 See paragraph 4.1.10 and 4.2.5.

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4.4.7

Subsection four: dispensation

The DCB can offer (partial) dispensation for the policy on the sound conduct of business, the minimum number of persons determining the day-to-day policy and the place from which they perform their activities, the operational structure, minimum members of the Supervisory Board and the requirements on the financial year (article 2:26b subsection four FSA). In my view, partial dispensation for the policy on the sound conduct of business and the operational structure is more easily obtained. This is because the captive only insures risks of the groupmembers. Therefore, the operating businesses need less protection than outside customers. In addition, a captive has direct contact with its policyholders and because of that the captive can take measures when necessary. As for the other requirements where dispensation is possible for, I believe the treatment will be equal to the insurance company.

4.4.8

Chapter 3.6 Financial Supervision Act

The final point of interest is that the captive reinsurance company discussed here is the singleparent reinsurance captive. By which is meant that this captive is part of a group. Therefore, Chapter 3.6.3 of the Financial Supervision Act is of importance as well. This Chapter contains supplementary supervision on the reinsurance captive of a group.196

4.5 Overview

From the acquired information above, the following overview can be obtained:

Requirements for

Insurance

Captive

Reinsurance

Captive

entering the market

company

insurance

company

reinsurance

company Starting article 1. Expertise: 3:8 FSA

196

company

2:31 FSA

2:31 FSA

2:2b FSA

2:26b FSA

Required

Required

Required

Required

See also paragraph 4.2.8.

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Required

Required

Required

Required

Required,

Because of

Required,

Because of

sound conduct of

dispensation is

lower risks less

dispensation is

lower risks less

business: 3:10

possible

required +

possible

required +

2. Properness: 3:9 FSA 3. Policy on the

FSA

dispensation is

dispensation is

possible

possible

2 persons,

2 persons, place

2 persons,

2 persons, place

of persons

place of

of registered

place of

of registered

determining the

registered

office.

registered

office.

day-to-day-policy

office.

Dispensation is

office.

Dispensation is

and the place

Dispensation is

possible

Dispensation is

possible

from which they

possible

4. Minimum number

possible

perform their activities: 2:31 FSA 5. Control structure: 3:16 FSA

Required,

Required,

Required,

Required,

decomposition

decomposition

decomposition

decomposition

FIRM

FRIM more

FIRM

FIRM more

relevant

relevant

Required,

Because of

Required,

Because of

structure: 3:17

dispensation is

lower risks less

dispensation is

lower risks less

FSA

possible

required,

possible

required,

6. Operational

dispensation is

dispensation is

possible

possible

3 members,

3 members,

3 members,

3 members,

of members on

dispensation is

dispensation is

dispensation is

dispensation is

the Supervisory

possible

possible

possible

possible

Public limited

Public limited

Public limited

Public limited

liability

liability

liability

liability

7. Minimum number

Board: 3:19 FSA 8. Legal form: 3:20 FSA

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company,

9. Minimum equity capital: 3:53 FSA

10. Solvency: 3:57 FSA

company

company,

company,

mutual

mutual

involves

association or

association or

additional costs

European

European

company

company

2,3 million

2,3 million

3 million Euros

1 million Euros

Euros or

Euros or

3,5 million

3,5 million

Euros

Euros

Depending on

Because of

Depending on

Because of

variables

variables

variables

variables

generally less

generally less

Calendar year,

Calendar year,

Calendar year,

Calendar year,

dispensation is

dispensation is

dispensation is

dispensation is

possible

possible

possible

possible

DCB/AFM.

Always of

DCB/AFM.

Always of

shareholder,

Apply + belief it

importance.

Apply + belief it

importance.

declaration of no

will be granted.

DCB/AFM.

will be granted.

DCB/AFM.

objection:

Non-opposition

Apply + belief it

Non-opposition

Apply + belief it

subsection two

procedure.

will be granted.

procedure.

will be granted.

11. Financial year: 3:70 FSA

12. Qualified

Non-opposition

Non-opposition

procedure.

procedure.

12 and 14

12 and 14

12 and 14

12 and 14

information:

Decree on

Decree on

Decree on

Decree on

subsection three

market access

market access

market access

market access

of financial

of financial

of financial

of financial

corporations

corporations

corporations

corporations

FSA

FSA + intra-

FSA

FSA + intra-

13. Required

group contracts

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group contracts

4.6 Conclusion

Thanks to the overview differences between the four types of insurers become clear. I will focus on the requirements which are or can be of importance for third parties. Because the aim of this thesis is finding out what guaranties third parties have and what they should have when a captive is involved. When addressing these requirements, I will give my view on what should be required of a captive. But before doing so, I would like to add that the legal requirements are (most of the time) identical. However, this does not mean that the DCB treats all insurance company-forms equally, because the DCB uses the risk-based supervision.197 For that supervision, the previously-addressed method FIRM is used.

Regarding the expertise and properness of the day-to-day policy makers the lower legislation gives detailed information on what documents and information must be sent to the DCB in order to determine the expertise and properness. The required information is thus equal. However, after the license has been granted the policy makers of a conventional insurance company will be subject to more supervision as the risks involved for the financial market are bigger. This is a consequence of the risk-based approach of the DCB.

As for the policy on the sound conduct of business this conduct is created by using the Demingcircle. This means that policy is based on the risks in place. In other words, no minimum policy is in place. It is entirely custom-made. As a consequence, the policy requirements for a (re)insurance captive will be lower simply because there are not as much risks involved as in a conventional insurance company. In addition, (partial) dispensation is more easily achieved by a captive as the policy on the sound conduct of business of a captive only affects the group internally. This is a consequence of the fact that a (reinsurance) captive only (re)insures risks originating from its own group. The captive can argue that the objective of customer protection is not relevant in this situation and therefore, this requirement is earlier fulfilled. Of course as far as the external financial market is affected, policy on the sound conduct of business has to be adequate. The only point missing here is related to third parties. Protecting third parties is

197

See the beginning of Chapter four.

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not seen as one of the objectives of the DCB nor the Financial Supervision Act. In my view, this requirement should be added especially regarding the policy on the sound conduct of business. When an adequate policy for dealing with third parties is in place, it is unlikely problems will come to exist. Of course, this point is only of interest in the case of liability. In addition, it is not only of importance for captives, but also for insurance companies. Therefore both the insurance company and the captive have to be supervised on having an adequate policy for dealing with liability-issues where third parties are involved.

Regarding the minimum number of persons determining the policy, I believe having the required two persons on the Board of Directors and three members on the Supervisory Board is sufficient. Especially when realizing that the DCB also supervises the captive. Regarding the place where from activities are undertaken, I believe that that decision can be left to the captive itself. As long as it functions and keeps the interests of third parties in mind. The same can be argued for the control structure. A group can have a complex structure as long as it does not circumvent its duties towards third parties. However, in order to have adequate supervision the control structure cannot be too complex. The DNB has to be able to supervise captives after decomposition of the group-elements.

Of course, an operational structure generally is in place. But does in need to be subject to supervision? It is an internal mechanism to deal with the risks of the captive itself. This leads to the view that no supervision is required. However, when a poor risk-management is in place third parties can be left with empty hands. This is not preferred and thus supervision on this matter is required for captive insurance companies. Of course, captives have to deal with other risks than insurance companies as a result of the fact that captives only offer insurance for operating businesses out of its own group as opposed to private persons on the external market. In addition, captives can alter their policies more easily as they receive adequate information of the operating businesses. In other words, the distance between the policyholder and insurer is smaller for captives. This leads to the view that, when adequate information systems are in place, captives can be subject to less supervision. Partially, I agree but this does not mean that the interests of third parties are taken into account. This should be dealt with in

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the operational structure of a captive and the DCB should supervise on this matter, despite the previous arguments.

About the legal form of the (re)insurance captive, it will generally be a public limited liability company. Whether its form originates from the Netherlands or another country is in my view not of importance; as long as it fulfils the other requirements. This also means that a captive should not be limited to the public limited liability company. The additional costs involved for changing the legal form from a private to a public limited liability company cannot be justified. In addition, I do not believe supervisory problems would arise if the legal form would be a private limited liability company.

As for the minimum guarantee fund, I believe that sufficient capital has to be in place for the captive. Of course, this depends on the exact risks in place. In my view the required 2,3 or 3,5 million Euros is sufficient capital for indemnification. I do not see a problem for the lower minimum guarantee fund requirement for the reinsurance captive, because this is only relevant on the reinsurance market. This means that the risk (relevant to third parties) is covered on the primary insurance market. The third party can be indemnified on that primary market. It stretches too far to allow third party protection on the reinsurance market. Therefore, a lower minimum guarantee fund on the reinsurance market does not create problems.

Regarding the solvency requirements, all forms of insurance companies have to deal with the same calculation and variables. This seems reasonably to me, certainly because ceiling -numbers are used. The minimum solvency margin increases when variables exceed that ceiling. This means that a large insurance company will earlier exceed the ceiling. Generally, a captive is a small insurance company as it only covers the risks of one client (its own group). Thus, a captive is unlikely to exceed that ceiling.

As we know, a captive is a part of a group. The holding (parent company) can influence the business of the captive. Although this has a negative influence on the performances of the captive (as appears from Chapter two and three). Therefore it is of importance that a declaration of no objection is required. One of the requirements for this declaration is that the - 68 -

day-to-day policy makers of the holding of the captive have to fulfil the requirements of expertise and properness.198 Although this offers some guaranties, this does not give sufficient guaranties regarding the influence of the holding on the captive. The declaration of no objection has to be declined when the holding company strongly influences the captive. This is because the parent is interested in making revenue. For the captive this means not paying out money outside the group of corporations (for example to third parties). This contradicts with the interest of third parties. Therefore, the declaration should not be given when the parent influences the captive.

Finally, it needs to be kept in mind that risk related to third party liabilities are often covered within a captive (See exhibit D). In addition, the DCB has the means in place to supervise captives for third parties rights. The need of additional protection of third parties exists because captives act under the radar. The vagueness around a captive is not a reason to hide from the interests of third parties. These should be taken into account in the policy of the captive and the DCB should add it as one of their supervisory objectives. Of course, when a captive only covers risk of merely internal importance policy should not be altered, nor should the DCB supervise for protecting the interests of third parties.

198

See article 3:100 subsection one under a and b FSA.

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5. The legal rules of the Dutch Civil Code related to third parties

Not only the Financial Supervision Act is of importance, but also the Dutch Civil Code as it gives information relating to third party protection. Firstly, article 3:287 DCC contains a privilege of the third party over other creditors of the debtor. As previously mentioned, insurance is laid down under Title 7.17 DCC where a specialized version of art. 3:287 can be found; the direct action. The final points of interest are laid down under Title 5 of Book six concerning insurance on behalf of third parties. The question of importance is whether these rules are applicable for the captive as well. In order to answer these questions, the articles will be discussed. Firstly, article 3:287 DCC shall be explained. As article 7:954 DCC is the specialized version of article 3:287 DCC I will firstly go through those requirements. Where after the applicability of the two articles shall be discussed. Thereafter the focus lies at the articles relevant for the insurance on behalf of third parties. Also for these articles, the applicability for captives will be discussed.

5.1 Article 3:287 of the Dutch Civil Code

In the year 1938 P.M. de Vries d’Amblée had the view that insurance for people in motor vehicles should be mandatory in order to protect the interests of the traffic victim. By such mandatory insurance, the victim would be redeemed.199 Lippmann noticed in 1951 a shift in the insurance field: firstly, liability insurance was a way to protect the damage-causer against liability for third parties claims. Nowadays, it becomes more and more important that the insurance payments reach the injured person. Reaching the injured person is especially difficult in the case of insolvency of the insured party. According to Lippmann, the payments would reach the injured party when that party would have a privileged claim over other debtors.200 In accordance with this view article 3:287 DCC was created. This article exists since the 22nd of November 1991 and it came into effect on January first 1992201. The aim of this article is making

199

P.M. de Vries d’Amblée, Schadeverzekeringovereenkomst in de Fransche Wet van 13 juli 1930, (diss. Leiden) 1938, p. 221-224. 200 J.Ev.M. Lippmann, Verzekering tegen wettelijke aansprakelijkheid, (diss. Leiden) 1951, p. 23 e.v. and p. 218. 201 22-11-191, Stb. 1991, 600 (uitgifte: 18-12-1991, kamerstukken: 3770); see also Asser/Clausing & Wansink 5-VI 2010/329.

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sure that the insurance payments reach the injured person in case of insolvency of the insured. This is effectuated by giving the claim of the injured party a higher class compared to other third party debtors without giving the injured party a personal right against the insurer.202 Thereto it states that:

(1) A claim for compensation of damage shall create a privilege upon any claim which the debtor might have against the insurer pursuant to liability insurance, to the extent that such claim relates to the obligation to compensate such damage. (2) A creditor may have recourse in respect of this claim against a claim which is subject to a right of privilege, without any third person being entitled to claim other rights hereto, except for the right of an intermediary to demand payment pursuant to Article 936, paragraph 2 of Book 7.

Paragraph one clarifies that the injured party has a privileged right on the insurance claim which the insured has on its insurer on the ground of liability insurance over other debtors.203 In order to achieve this privilege conditions have to be met. Firstly, liability insurance has to be in place. Secondly, damage has to be caused. Finally, an obligation to compensate the damage has to exist and has to relate to the claim. Accordingly, the situation looks as follows:

202

F. Oosterveen, T&C Burgerlijk Wetboek, commentaar op artikel 287 Boek 3 BW, 2011; see also J.G.C. Kamphuisen e.a., Het nieuwe verzekeringsrecht: Titel 7.17 belicht, Deventer: Kluwer 2005, p. 190-191. 203 Asser/Clausing & Wansink 5-VI 2010/325.

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Figure 7. The injured party has a privileged claim over the other debtors of the insured according to article 3:287 DCC.

In case of bankruptcy of the insured party, the debtors wish to retain their money. The insurance claim towards the insurance company is a way to retrieve money. Accordingly, the debtors are interested in the insurance claim. To prevent other debtors from receiving the insurance claim which belongs to the injured party, the injured party has a higher position, in other words a privileged claim. Hence, the injured party will be (partially) redeemed by the insurance claim. Because the insurance claim will most likely be equal (or less for example because the damage goes above the insured coverage) to the amount of what the injured party can claim it is unlikely that a part of the insurance claim remains for the other debtors. A justification for the preferred position of the injured party and not acting in accordance with the paritas creditorum (equality of debtors) is found by the fact that the injured party became a debtor of the insured without his own action and the injured party is not a party in the insurance agreement. The latter means that the injured party had no influence on the conditions in the insurance agreement. Another reason that pleads for a higher class for the injured party is the unbreakable connection between the claim of the injured party against the insured and the claim of the insured towards the insurer.204 The final justification is that the other debtors should not profit from the coincidence that the insolvent insured has an insurance claim against the insurance company.205

204 205

Asser/Clausing & Wansink 5-VI 2010/325. J.G.C. Kamphuisen e.a., Het nieuwe verzekeringsrecht: Titel 7.17 belicht, Deventer: Kluwer 2005, p. 191.

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Paragraph two of the article makes clear that the privileged position of the injured party goes above all third party rights. However, this is not entirely true as it gives an exception for the intermediary between the insurer and insured who is entitled to payments from the insurer for premium payments made in advance (article 7:936 under 2 DCC). This has been decided because the injured party would not have had a privileged claim when the intermediary did not make the premium payments towards the insurer.206 In other words, without the actions of the intermediary no insurance would have been in place.

5.1.1

Applicability of article 3:287 DCC for the captive insurance company

In my opinion article 3:287 DCC is applicable for the captive. First of all, because the interests that lead to the creation of article 3:287 are also of importance for third party liabilities insured by a captive. The article was created because of the view that: victims should be redeemed; the third party became without its own action a debtor of the operating business even though the third party was not a party in the insurance agreement; other debtors should not profit from the coincidence of an insurance claim; and the final reason was the unbreakable connection between the claim of the third party on the operating business and the claim of the operating business on the captive.

Secondly, the requirements of article 3:287 DCC are fulfilled by a captive. The first requirement is that liability insurance has to be in place and third party liability insurance is a form of liability insurance. Secondly, damage has to be caused to the third party. This is an entrance requirement, without damage no problems would arise. The third and final requirement is that the obligation to compensate damage must exist and has to relate to the claim. Regarding the obligation to compensate, this obligation is present under the same conditions as for an insurance company (for example as a consequence of a wrongful act). Of course, the risk of such an obligation to compensate has to be covered by the captive in order to have an insurance claim. This will be the case when the captive covers third party liabilities.

206

Kamerstukken II, 2004/2005, 30 137, nr. 3, p. 3 (MvT).

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As a final argument why article 3:287 DCC is applicable for captives I would have to refer to the layered structure. Book three of the Civil Code contains more general rules than title 7.17 DCC. Therefore, it can be argued that article under Book three is broader and thus earlier applicable. Because it is broader a captive falls within the scope of the article as well. In my view, third parties can appeal to article 3:287 when a captive covers the risk that materialized related to those third parties. This offers protection for third parties.

Article 3:287 DCC seems like the perfect mechanism. However, it does have its weaknesses. For instance, it is possible that the payments from the insurer end up with the creditors of the insured in the event of insolvency of the insured party. For example in the event that the insurer already paid out towards the insured, leaving the injured party with empty hands and remaining with a low-level claim and thus the privilege is no longer of value.207 In addition, the article does not reach its full potential when the insured goes bankrupt before the insurer makes payments. This is because the injured party in that case has to contribute towards the insolvency costs according to article 182 of the Dutch Insolvency Law.208 In reality, when the insured goes bankrupt, the trustee has to do what is in the best interest of the estate. And starting a procedure against the insurer for which the costs are bore by the estate and the benefits will go to the injured party is not in the interest of the estate. This is because the only benefit it will have is a contribution to the previously mentioned insolvency costs and these benefits of the estate do not outweigh the costs involved.209 Therefore, when the insurance company does not accept the insurance claim and a procedure has to be started. The trustee will not start such a procedure, leaving the injured party with empty hands. And even if a procedure is started, it is not rare that nothing remains for the injured party because of the high insolvency costs.210 However, the injured party does maintain its preferred position as it receives payments before 207

T.J. Dorhout Mees, Schadeverzekeringsrecht, Zwolle: Tjeenk Willink 1967, p. 521; P.M. de Vries d’Amblée, Schadeverzekeringovereenkomst in de Fransche Wet van 13 juli 1930, (diss. Leiden) 1938, p. 221; J.Ev.M. Lippmann, Verzekering tegen wettelijke aansprakelijkheid, (diss. Leiden) 1951, p. 217; see also J.H. Wansink, De algemene aansprakelijkheidsverzekering, (diss. Rotterdam) Zwolle: Tjeenk Willink 1987, p. 359. 208 J.H. Wansink, De algemene aansprakelijkheidsverzekering, (diss. Rotterdam) Zwolle: Tjeenk Willink 1987, p. 332 e.v. 209 HR 9 juni 2000, NJ 2000, 577; see also Asser/Clausing & Wansink 5-VI 2010/331. 210 J.G.C. Kamphuisen e.a., Het nieuwe verzekeringsrecht: Titel 7.17 belicht, Deventer: Kluwer 2005, p. 191.

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seize of the treasury and pledge-holders.211 Finally, even without bankruptcy of the insured the injured party carries the risk that the insured does not hand over the money to the injured party.212 The view that article 3:287 does not offer sufficient protection is shared by many writers.213

5.2 Article 7:954 of the Dutch Civil Code: the direct action

The Lower House (‘Tweede Kamer’ in Dutch) presented a Bill for the determination of Section 7.17 (insurance) on may 16th 1986. The parliament in that time decided to wait until the bills concerning the law of inheritance were completed. However, this took more time than was anticipated. Therefore, the bill for Section 7.17 gained interest again during the year 1999.214

One of the inserted articles was the direct action, now laid down under article 7:954 DCC. This article came into effect on January first 2006.215 A direct action gives the injured party the authority to claim damages directly towards the insurer. But only if the insurer is liable to make payments and up to the amount to which the policyholder is entitled. The desire for this direct action was present in order to solve the previously mentioned shortcomings of article 3:287 DCC.

The direct action expresses the view that the insurance payments have to reach the injured party, in other words the victim has to be protected from for example insolvency of the insured party through which the injured person will not receive any or less indemnification.216 The view that the victim has to be redeemed is strongest in the case of death or personal injury. In

211

Kamerstukken II, 1999/2000, 19 529, nr. 5, p. 32-33 (NvW I); see also Groene Serie Bijzondere overeenkomsten, 1 Directe actie bij: Burgerlijk Wetboek Boek 7, Artikel 954. 212 C.C. Van Dam & E.A. Waal, ‘De directe actie in titel 7.17 BW’, in: T. Hartlief & M.M. Mendel, Verzekering en maatschappij, Deventer: Kluwer 2000, p. 107. 213 W. H. van Boom, ‘Hoe geprivilegieerd is het voorrecht op de verzekeringspenningen? Herkomst, werking en tekortkomingen van art. 3:287 BW’, WPNR 1944-6151, p. 635-640; see also C.C. van Dam, Verzekering naar komend recht, Preadvies voor de vereniging Handelsrecht en de Vereniging voor Verzekeringswetenschap, Zwolle: Tjeenk Willink 1995, p. 125-126. 214 Kamerstukken II, 1999/2000, 19 529, nr. 5, p. 16 (NvW I). 215 22-12-2005, Stb. 2005, 702. 216 Asser/Clausing & Wansink 5-VI 2010/325.

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addition, whenever a person is connected to a certain property, that good normally is insured and therefore the problem of not reaching the insured person is not at hand. Furthermore, the direct action is an additional burden for an insurance company. It is for these reasons that the direct action has been limited to personal damage as a result of death or personal injury.217 The consequence of this line is that whenever the injured party suffered personal injury and damaged property, the direct action can only be used for the personal injury. Accordingly, the claim based on the damaged property shall be non-admissible in a proceeding against the insurer.218

Article 7:954 paragraph 1 DCC states:

Where, in the case of an insurance against liability, the insurer is notified pursuant to Article 941 of the materialization of the risk, the injured party may demand, if the insurer is liable to make a payment, that the amount which the insured may claim on account of the loss of the injured person as a result of death or personal injury be paid to him.

As appears from the wording of the article, the type of insurance in place has to be liability insurance. In addition, the injured party can only claim the amount that the insured is entitled to. The injured party only has the derived right of the insured party and takes over the position of the insured party i.e. only what the insured party is entitled to can be claimed. The injured party thus cashes the claim out of insurance of the insured.219 The logical consequence is that when the insurer is not obliged to pay out to the insured, this is neither the case for the injured party. Case law shows that when there is no liability of the insured, the injured party does not have the option of applying for the direct action.220 This is a result of the vision that the injured

217

Kamerstukken II 1999/2000, 19 529, nr. 5, p. 32-34 (NvW I). Groene Serie Bijzondere overeenkomsten, 3 lid 1 directe actie bij: Burgerlijk Wetboek Boek 7, Artikel 954. 219 Wansink & Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 954 Boek 7 BW, 2010; see also J.G.C. Kamphuisen, e.a., Het nieuwe verzekeringsrecht: Titel 7.17 belicht, Deventer: Kluwer 2005, p. 183-184. 220 Rb. ’s-Hertogenbosch 25 april 2007, NJ 2007, 286; see also Rb. ‘s-Hertogenbosch 18 april 2007, LJN BA3146. 218

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party should not receive a larger cover than the insured is entitled to. It is therefore that the insurer can also appeal to the law and the policy terms against the injured party. This is only different when the liability insurance is forced by law because of the importance of protecting the victim. For example in accordance with the Motor Vehicles Liability Insurance Act (‘Wet aansprakelijkheidsverzekering motorrijtuigen’ in Dutch)221, the owner of a motor vehicle who uses it on the public road is obliged to have an insurance for the people in that car, the only person that can be exempted from the insurance is the driver who is liable for the damage caused by the vehicle. According to article six in conjunction with article 11 of that Act the injured person has a personal right to claim damages directly from the insurer. From this point, however, the direct action is different as it does not give a personal right to claim damages to the injured person. A separate agreement for payment between the insurer and the injured is not created. The person who can claim insurance payment is the injured person; the ius agendi (the right to claim damages) lies at the injured instead of at the insured party. In addition, the insurer can only be released from its duty when it pays the injured party. Although this is not for an infinite period of time: when the insurer requested to the injured party to inform whether he or she would like to use the direct action or not within four weeks and this time passed, the insurer can pay to the insured without repercussions. This is laid down under paragraph 3 of article 7:954 DCC. However it should be added that the insurer is allowed to pay directly towards the injured party even though there was no request for the direct action within the period of four weeks (article 6:30 DCC). This payment releases the insurer from payment of the insurance claim (article 6:32 DCC).222

221

Some other examples are article 55 under 1 of the Dutch Flora and Fauna Act (‘Flora- en Faunawet’ in Dutch)and article 4 of the Dutch Nuclear Incidents (Third Party Liability) Act, Stb. 1997 No. 225 (‘Wet aansprakelijkheid kernongevallen’ in Dutch). 222 Kamerstukken II 1999/2000, 19 529, nr. 5, p. 34-37 & 40-41 (NvW I) see also; Kamerstukken II 2001/2002, 19 529, nr. 8, p. 5 (NvW II); see also Groene Serie Bijzondere overeenkomsten, 5 lid 3 bevrijdend betalen door de verzekeraar bij: Burgerlijk Wetboek Boek 7, Artikel 954; see also Asser/Clausing & Wansink 5-VI 2010/334-338.

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Figure 8. Overview of the direct action.

Shortly, the insured remains the creditor of the insurer, as the payment is due to him or her. Only the thereto connected right to claim damage belongs to the injured party. As a consequence, the insurer can settle the payment with unpaid premium payments of the insured. In addition, the injured party does not become a debtor of the insurer. Therefore, the injured party only has one debtor regarding its damage; the insured. This gives the injured party two options: claim damages from the insurer or claim damages from the insured. Both can be addressed as well, although it should be kept in mind that when one pays out, the other is released from its duty of performance.223

Article 7:954 states that the injured can only use the direct action if the insurer has been notified in accordance with article 7:941 DCC. Regarding the requirements for notification the general rule is laid down under subsection 1 of article 7:941 DCC. It declares that, in principle, the injured party is only allowed to directly claim insurance from the insurer when the insured notified the insurer of the realization of the risk.224 For the insured, it can be preferred to settle with the injured party without intervention from the insurer. For example to prevent the loss of the no-claim discount. Because the injured party should not be able to interfere with this desire, the law gives an opportunity: the insured simply does not notify the insurer. When another person than the insured notifies, the injured party is not allowed to go directly to the insurer. In such a situation, the insured person can settle the claim with the injured party. In addition, the requirement of notification is of importance to prevent others than the injured party to claim

223

Kamerstukken II 1999/2000, 19 529, nr. 5, p. 37 (NvW I); see also Wansink & Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 954 Boek 7 BW, 2010. 224 Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 954 Boek 7 BW, 2010.

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damages from the insurer.225 This leaves the injured party with merely one option: claim damages from the insured. However, the injured party can take measures to protect himself. Whenever the event is not notified, the injured party is the only person who can, according to subsection 4 of article 7:954 DCC, distrain upon the claim of damages of the insured towards the insurer. In this way, the injured party can make sure he or she receives the payments even though the insurer has not been noticed. This article also gives the option for the insured to cede its claim on the insurer to the injured party and states that the claim cannot be ceded to anyone else.226 Although this will not always be necessary to use as the direct action already obliges the insurer to make payments to the injured party directly.227 As a final note, before notification the insured neither has the insurance claim at his disposal.228 Simply because at that time, no insurance claim exists.

The insurer cannot be notified if the insured is a legal entity that no longer exists. This can happen when there lies a long period between the event that caused damage and the manifestation of damage, in other words the long-tail damage. And long-tail damage is likely to exist when dealing with the results of rapid technological development. Whenever a legal entity ceased to exist, the injured can claim damage directly from the insurer without notification according to subsection 2 of article 7:954 DCC. A legal entity ceases to exist after a dissolution (article 2:19 DCC). Thus, when an injured party finds out that the damage causing corporation no longer exists, it can claim damage from the insurer directly. It is because of this possibility that the injured party can no longer request for the reopening of the liquidation according to article 2:23c DCC.229 In this liquidation the liquidator handles the remaining claims of a legal entity after dissolution. However, especially in the event of long-tail damage, it is possible that the insurer in no longer a solution as the injured party can no longer claim damages because of the passing of time by which the risk is no longer covered or the insurer ceased to exist as well.

225

Groene Serie Bijzondere overeenkomsten, 3 lid 1 directe actie bij: Burgerlijk Wetboek Boek 7, Artikel 954. 226 Kamerstukken II 1999/2000, 19 529, nr. 5, p. 38-39 & 41 (NvW I); see also Groene Serie Bijzondere overeenkomsten, 6 lid 4 beschikkingsbevoegdheid van de verzekerde bij: Burgerlijk Wetboek Boek 7, Artikel 954; see also Asser/Clausing & Wansink 5-VI 2010/339. 227 Hof ’s-Gravanhage 19 oktober 2006, NJF 2007, 81. 228 Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 954 Boek 7 BW, 2010. 229 HR 31 oktober 1997, NJ 1998, 258.

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In such a situation, the injured party has to request for the reopening of liquidation. Although this is only possible when there is or was a positive balance.230 Another way a legal entity ceases to exist is after a merger or division by acquisition whereby the total capital is transferred by a universal succession of title. The receiving legal entity then owns all the debts and credits of the ceased company. This means that the receiver has to notify the insurer in the event of damage. Finally, the insurer has to be notified in the event of a division by acquisition whereby only the commitment to compensate damage is transferred to the receiving legal entity (article 2:334a subsection 3 DCC). Then, the first (selling) legal entity does not cease to exist. It is therefore, that the injured party can address both the first and receiving legal entity and either of those can notify the insurer.231

Whenever the injured party has been indemnified (by the insurer or insured) the direct action is no longer in effect according to subsection 7 of article 7:954 DCC. In the event that others (for example a social insurance) have redeemed the injured party this paragraph prevents them from using the direct action in order to get recovery. Finally, this section makes sure the direct action cannot be used when the injured party receives protection for example under the Motor Vehicles Liability Insurance Act.232 As such an act offers its own third party protection.

Subsection 5 of article 7:954 DCC pays attention to the situation that the insured sum is exceeded because of the fact that there are more than one injured persons, the damage is simply bigger than was anticipated or the insurer also has to pay for the costs made to reduce the damage as a consequence of which the insured sum is exceeded. Without this section, only the injured parties who claim first will see their damage recovered. The remaining injured persons shall remain with one possibility: claim damages from the insured, whose capital might not be sufficient. The aim of this section is to treat all injured persons equally. Therefore, the due payments shall be prorated to the loss of each of the injured persons, related to the type of

230

Kamerstukken II 1999/2000, 19 529, nr. 5, p. 39 (NvW I). Kamerstukken II 1999/2000, 19 529, nr. 5, p. 39-40 (NvW I); see also Asser/Clausing & Wansink 5-VI 2010/337. 232 Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 954 Boek 7 BW, 2010; see also Groene Serie Bijzondere overeenkomsten, 10 lid 7 geen mogelijkheid tot instellen van een directe actie bij: Burgerlijk Wetboek Boek 7, Artikel 954. 231

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loss suffered. This can be damage from personal injury or death or another type of damage.233 Because the insurer cannot be aware of other injured persons, more could have been paid to the earlier known injured persons as they have received more than was proportionate. Whenever the insurer made those payments in good faith, the insurer will only be liable for the balance of the insured sum towards the later injured persons.234 In order to act in good faith high demands can be expected of the insurer because of the interests of the injured parties and the expertise of the insurer. For example the insurer can have the obligation to place an advert in the local or national newspaper.235 Whenever the insurer is aware of the fact that there are more injured persons for which the proportionate part has to be determined or whenever the size of the damage is not yet familiar, the payment to all the injured persons may be suspended.236 Suspension is only allowed when there may be reasonable grounds for doubt as to which amount should be paid (last sentence subsection 5). Therefore, injured persons can apply for a payment in advance when this doubt is absence.237 But still, despite paragraph 5 the possibility remains that out of a group of injured persons, only the first get redeemed.

Because of inserting of the direct action in title 7.17 DCC, it lays in the line of expectations that insurer and injured person(s) try to settle the case. However, when an agreement cannot be made the injured person(s) can go to court. The insured has an interest in such a proceeding, although he is in principle not bound by the final judgment. This is remarkably as the injured party still can claim damages from the insured when the claim in court was denied or when only a part of the damage was redeemed, then the remaining part can be claimed from the insured party. To prevent complications it is laid down under section 6 of article 7:954 DCC that the injured party has to ensure that the insured is summoned to appear in the proceeding in time.238 A defendant is summoned in time when he has the opportunity to clarify its views and when the

233

Kamerstukken II 2001/2002, 19 529, nr. 8, p. 5 (NvW II). Kamerstukken II 1999/2000, 19 529, nr. 5, p. 41 (NvW I). 235 J.G.C. Kamphuisen e.a., Het nieuwe verzekeringsrecht: Titel 7.17 belicht, Deventer: Kluwer 2005, p. 208 e.v., C.C. Van Dam & E.A. Waal, ‘De directe actie in titel 7.17 BW’, in: T. Hartlief & M.M. Mendel, Verzekering en maatschappij, Deventer: Kluwer 2000, p. 114; see also Asser/Clausing & Wansink 5-VI 2010/339. 236 Kamerstukken I 2004/2005, 19 529, nr. B, p. 21-22 (MvA I). 237 Kamerstukken II 2004/2005, 30 137, nr. 8, p. 8 (NV II). 238 Van Tiggele-van der Velde, T&C Burgerlijk Wetboek, commentaar op artikel 954 Boek 7 BW, 2010. 234

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defendant is not harmed in its defence.239 The same view is used to clarify the meaning of ‘in time’ under section 6.240

It needs to be added that besides the direct action article 3:287 DCC remains in effect, especially when it concerns other than personal damage.241 As the direct action focuses on the injured person as a result of death or personal injury, article 3:287 DCC will be used for other types of damage. The view that the direct action offers more protection than article 3:287 is stronger because of article 7:963 subsection 4 DCC which states that you cannot deviate from article 7:954 in the prejudice of the injured party.

In summary, for a successful claim from a third party toward the insurer there needs to be a liability insurance and the insurer has to be notified of the realization of the risk. In addition, the insurer has to be obliged to pay out, i.e. cover needs to be present.

5.2.1

Applicability of the direct action for the captive insurance company

The question remains whether the direct action is applicable for the captive. As we have seen before a captive can be active on the direct insurance market and the reinsurance market. When a captive is on the reinsurance market the risk of the operating business is covered firstly on the direct insurance market by a conventional insurance company. In that situation, the third party (whom suffered damage from the affiliated business of the captive) can apply for the direct action. Because its opponent is the conventional insurance company. The reinsurance captive cannot be reached as it is only of importance in the reinsurance relationship (on the market behind the direct insurance market). It stretches too far to allow the direct action for the reinsurance captive because of the distance to the injured party. In addition, the injured party can claim damages from the conventional insurance company. The question that needs to be answered is whether the direct action is applicable for the direct captive. As the law stands now, the direct action has not been applicable for the captive, or at least it has never been tried.

239

HR 7 maart 2003, NJ 2003, 244. Rb. Rotterdam 30 januari 2008, LJN BC6139. 241 Kamerstukken II 1999/2000, 19 529, nr. 5, p. 41 (NvW I). 240

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The direct action is laid down under title 7.17 DCC named, insurance. The first article (7:925 DCC) gives the definition of insurance. In the literature requirements in order to speak of insurance can be found. This information is used in order to figure out whether the captive falls under the definition of a conventional insurance company or not. When the captive falls under the definition of title 7.17, article 7:954 and the previous books of the Dutch Civil Code are of importance for a captive in the Netherlands. The parts of the Civil Code before title 7.17 are of importance because of the layered structure of this Civil Code.242 In order to determine the outcome, the conditions of an insurance company will be addressed.

An insurer makes insurance contracts. The first requirement in order to speak of an insurance contract is the reciprocal agreement. The insurer offers insurance in exchange for premium payments made by the insured. The determination and payment of the premium payments can be organized in various types of ways. For example it is allowed to determine the amount of the premiums periodically or to determine them afterwards.243 Accordingly, captive’s way of determination and payment of premium payments falls within the scope of what is allowed for the conventional insurance company. A captive offers insurance in exchange for premium payments. The exact conditions are laid down in the insurance contract (likewise the insurance company). In addition, a captive also has policyholders and it has to handle claims similar to a conventional insurance company. Therefore, a captive can be classified as a reciprocal agreement.

Secondly, there has to be uncertainty about if and when the insured risk happens for the insured and the insurer. This uncertainty can be split in the following two parts: uncertainty about the premium payments and uncertainty about the risk. It is sufficient if one of the two uncertainties exist.244 Uncertainty about the premium payments concerns when the insurance payments have

242

The Dutch Civil Code has a layered structure. This means that the first books are general and every next book is more specialized. This is also true for the structure within one book: the first titles are general and they get more specialized further on. 243 Asser/Clausing & Wansink 5-VI 2010/22. 244 Asser/Clausing & Wansink 5-VI 2010/18.

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to be made, how high these payments will be or how long the premium payments will last.245 This uncertainty has to exist at the time of signing the insurance agreement. Generally speaking, no uncertainty exists on this matter, as the insurance agreement offers this type of information. However, premium payments can be estimated afterwards or periodically and this can result in uncertainty. For a captive the same is true as it can also determine the premium payments periodically or afterwards. However, this type of uncertainty is most of the time absent.

Concerning the uncertainty about the risk: both for the insurer and the insured uncertainty has to exist about when and if the event takes place. However, it is vague what this uncertainty is. Before title 7.17 came to exist, insurance was laid down under the Dutch Commercial Code (‘Wetboek van Koophandel’ in Dutch). This act spoke of ‘uncertain events’ and ‘danger coming from the outside’246. An uncertain event is an event which lies outside the scope of expectations.247 When talking about the uncertain events, the entire happening has to be taken into account and it is not allowed to leave vital elements aside.248 Although the wordings ‘uncertain event’ and ‘danger coming from the outside’ are not laid down under title 7.17 DCC, it can be used to clarify the meaning of uncertain risks.249 Obviously, the risks involved in rapid technological development lie outside the scope of expectations and thus fulfil the requirement of uncertainty. In addition, as seen under paragraph 3.1 a captive is often used to circumvent the shortcomings of the conventional insurance company. For example when dealing with uncertain risks as then no insurance is offered or only against excessively high premiums.250 Therefore, general and third party liability are some of the top-favoured types of (re)insurance for the captive (see exhibit D). Generally speaking, these areas of liability cannot be predicted and are uncertain. Thus when uncertain risks are covered within the captive, it covers uncertain risks. But does this conclusion hold for other risks covered by a captive? According to the literature, the requirement of uncertainty related to liability insurance has been met when two

245

Asser/Clausing & Wansink 5-VI 2010/18-27; see also S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005, p. 36-45. 246 See article 246 and 637 of the Commercial Code. 247 Asser/Clausing & Wansink 5-VI 2010/25. 248 HR 19 november 1982, NJ 1983, 711; see also HR 2 mei 1997, NJ 1997, 597. 249 P. Clausing, ‘Onzeker voorval en onzekerheid’, in: M.M. Mendel e.a., Zekerheidshalve, Deventer: Kluwer 2003, p. 1-3. 250 See paragraph 3.1.

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conditions have been fulfilled. Firstly, the insured at the time of signing the insurance agreement knew that a damage causing event would take place, but the amount of the damage was unknown.251 And secondly, the insurer is aware of the fact that there is a high chance that damage will materialize.252 The required amount of uncertainty depends on the type of covered risk and what the insurance policy declares. It is thus possible for a captive to be treated as a conventional insurance company when it covers risks for which the amount of damage is unfamiliar. The second requirement will most of the time be fulfilled because the captive is created for the benefit of its related companies and therefore it will most-likely be familiar with the high chance of materialization of the risk(s). This is a result of the fact that a captive has shorter lines with its affiliated businesses than a conventional insurance company with its customers. Because of these shorter lines increasing or decreasing risks are earlier familiar with a captive. Although a captive know about the high chance of materialization of the risk and that the damage causing event will take place, being aware of the amount of damage is difficult if not impossible. Of course, one can argue that a captive can offer coverage for certain events. When this is the case, the captive cannot be seen as an insurance company. This view became clear from a decision of the Supreme Court of the Netherlands. It decided that risks cannot be covered if the materialization of that risk happened before the insurance was made and one of the parties was familiar with this.253 However, it is unlikely that a captive will cover these certain events. When an operating business takes its own expenses, these costs are reducing their profit. And a reduced profit means lower tax. Therefore it is unlikely that a captive will offer coverage for certain events and thus it can be stated that a captive covers uncertain risks.

A multinational with a captive generally also insures risks at a conventional insurance company. Whenever a risk materializes which is not covered by the insurance company and these costs cannot be borne by the operating business, the captive might be a solution. Then, the question rises whether the captive can refuse to pay out for such a risk when this risk has not been taken into account. The captive has been created for the benefit of the affiliated businesses and not providing the coverage needed is not acting in the benefit for those businesses. However, when

251

J.H. Wansink, De algemene aansprakelijkheidsverzekering: een hernieuwde beschouwing in het licht van titel 7.17 BW, Deventer: Kluwer 2006, p. 210 e.v. 252 H.M. Voetelink, VA 1980, p. 197-198. 253 HR 11 april 1997, NJ 1998, 111 (Bike Brothers).

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a captive bears those costs time after time that captive will not last long. In addition, even if the captive makes such payment. It cannot be said that it is no longer equal to a conventional insurance company as an insurance company can be compliant and offer insurance even if that has not expressively been agreed upon (the ‘coulantieregeling’ in Dutch). This leads to the view that a captive is equal to an insurance company.

According to the Tax Authorities of the Netherlands, a captive is not equal to an insurance company. One of the reasons it gives is that captives do not diversify risks as they only have one customer: their own group. As a consequence, costs do not drop. Lowering the costs is one of the core functions of an insurance company. In addition, a captive does not add value to the economic (insurance) process.254 Although this reasoning seems reasonable, it could not be upheld at the Supreme Court of the Netherlands. It held that risks transferred within a group have to be fiscally accepted when real premium payments are used. In other words, it has to be a business transaction.255

Concluding, a captive has insurance contracts and covers uncertain risks. In addition it pays out under similar circumstances as a conventional insurance company. Finally, even the Supreme Court of the Netherlands made clear to the Tax Authorities of the Netherlands that a captive should be fiscally treated as an insurance company. Therefore, a captive is similar to the conventional insurance company. Title 7.17 DCC is thus relevant for the captive and thus the direct action can be used against a captive.

5.3 Insurance on behalf of third parties and applicability for the captive insurance company

Now we have seen that the term captive can fulfil the conditions in order to speak of an insurance company, perhaps other parts of the Civil Code are of importance too. In the

254

Belastingdienst, ‘Captive: Geen invloed op fiscale winst verzekeraar’, Belastingdienst Amsterdam, 9 juni 2008, p. 10-13. 255 HR 21 augustus 1985, BNB 1985, 301; see also A. Oosenbrug, ‘Fiscale aanvaardbaarheid van de captive: a never ending story?’, in: D.H. van Offeren e.a. (red.), Over bruggen (opstellenbundel aangeboden aan J.G. Kuijl RA), Leiden: Faculteit der Rechtsgeleerdheid van de Universiteit Leiden 2010, p. 25-28.

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literature, information can be found about the insurance on behalf of third parties. Such insurance can be effectuated by the use of a clause in an agreement which gives rights to third parties. Because this is also applicable for contractual arrangement and not merely to insurance agreements, it could be of importance for the captive. But before focusing on the third party clause, some general information about the insurance on behalf of third parties shall be given.

It appears from article 7:945-947 DCC that an insurer can obtain insurance for himself, for a third party or for himself and a third party. (Co-)insurance for the benefit of a third party is only possible if there has been agreed upon according to article 7:946 DCC. That the insurance has been obtained for the benefit of a third party has to become clear from the policy terms. It is possible that the policy terms explicitly mention the third party (or parties) or it leaves the definition of a third party undefined. It is also possible that a reasonable explanation of the policy term leads to the conclusion that the insurance covers the interest of third parties, even though this was not explicitly mentioned in the agreement. It depends on the circumstances of the case whether the insurer wished to cover the interests of third parties and the insurer (ought to) understand this, or not.256

Insurance on behalf of third parties is described as the contracting of the insured (policyholder) on his own name but also on behalf of another party who has an interest at stake.257 However, this definition has a shortcoming; it does not make clear that insurance is generally obtained for the benefit of the policyholder and the coverage for third parties is of minor importance.258 Therefore, the following definition is preferred: The insurance whereby the insurer insures or co-assures the interests of third parties, without the conclusion of a contract between the insurer and the third party.259

256

Asser/Clausing & Wansink 5-VI 2010/271. T.J. Dorhout Mees, met medewerking van B. Wachter, Schadeverzekeringsrecht. Vierde druk. Zwolle: Tjeenk Willink: 1967, nr. 144. 258 F.R. Salomons, Verzekering ten behoeve van een derde. Zwolle: Tjeenk Willink: 1996, p. 4. 259 H.J. Scheltema, Algemeen deel van het schadeverzekeringsrecht (Vierde deel van M. Polak’s Handboek voor het Nederlandse Handels- en Faillissementsrecht). Vierde druk, bewerkt door F.H.J. Mijnssen. Alphen aan de Rijn: Tjeenk Willink 1991, p. 66. 257

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Insurance on behalf of third parties is an agreement with a jus quaesitum tertio (rights on account of third parties, ‘derdenbeding’ in Dutch) laid down under article 6:253 DCC. It gives a third party a personal right to appeal to a contract made between others, but only after acceptance by that third party. Thereto it states that:

(1) A contract creates the right for a third person to claim performance from one of the parties or to otherwise invoke the contract against any of them, if the contract contains a stipulation to that effect and if the third person so accepts. (2) Until its acceptance, the stipulation can be revoked by the stipulator. (3) Acceptance or revocation of the stipulation can be made by a declaration addressed to either of the other persons involved. (4) An irrevocable stipulation which has been made by gratuitous title is deemed accepted if it has come to the attention of the third person and he has not rejected it without delay.

The first condition is that an agreement has to be in place. For every agreement (also the insurance agreement), certain conditions have to be met. Firstly, an agreement can only be realized after offer and acceptance ex article 6:217 DCC. Secondly, because there is a freedom of choice to contract with whomever and under (almost) any conditions the contracting parties please, there must be an exercise of the will, revealed by a statement ex article 3:33 DCC. This exercise of the will can occur in any form according to article 3:37(1) DCC. Thirdly, as the exercise of will can be vague to the other contracting party, the principle of reliance ex article 3:35 DCC exists in order to protect them from misunderstandings such as whether a real offer has been made or not. Of course, this is also of importance for third parties and therefore the same principle is laid down in article 3:56 DCC for them. Finally, the offer must have reached the other contracting party ex article 3:37(3) DCC. An agreement is only reached when there is a harmony of will between the contracting parties; this is the case when offer and acceptance

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over one and another.260 In my view, no difficulties arise here regarding the agreement between the captive and the operating business.

Other requirements of article 6:253 are that the third party can only invoke the contract if that contract contains a stipulation to that effect. Thereto the contracting parties have to accept a clause which aim is creating a right of performance from the third party towards the insurer.261 In addition, the third party has to accept that stipulation by declaration to either of the contracting parties. Acceptance does not need to have a specific form (article 3:37 under 1 DCC), unless mentioned otherwise in the policy terms. Acceptance can be declared towards the policyholder or the insurer (article 6:253 under 3 jo. article 3:37 under 1 DCC). When the injured party goes to the insurer in order to be redeemed, the clause has been accepted. Although the policy terms can contain an extra condition for acceptation: the policyholder has to agree with an extra duty.262 Another requirement is that the third party must have a by the insurance covered interest at the time of the damage-causing event.263 From the moment the third party accepted his designation, he became a part of the agreement according to article 6:254 DCC. According to article 6:250 DCC, subsection 1 of article 6:253 DCC is binding.

Whenever such a clause is present in an insurance agreement, article 7:947 DCC is the specialized version of article 6:253 DCC and it contains further rules.264 It declares that the designation of a third party to whom payment must be made in the event of damage may only be revoked with cooperation of the insurer or the third party. Whenever the damage already exists, the policyholder can no longer revoke in corporation with the insurer. Deviation from this rule is not possible when it is detrimental to the third party according to article 7:963 DCC. In addition, when the insurer has to cover risks for third parties under an insurance agreement, the

260

Jac Hijma e.a., Rechtshandeling en Overeenkomst, Deventer: Kluwer 2010, p. 25-30; see also Asser/Clausing & Wansink 5-VI 2010/115. 261 Asser/Clausing & Wansink 5-VI 2010/276. 262 Kamerstuk II, 1975-1976, 7729, nrs. 6-7, p. 223 (MvA), Asser/Clausing & Wansink 5-VI 2010/277, J. C. van der Steur, GS Verbintenissenrecht, 9 Wijze van aanvaarding bij: Burgerlijk Wetboek 6, Artikel 253, 1999; see also J.C. van der Steur, GS Verbintenissenrecht, 4 Last voor derde bij: Burgerlijk Wetboek 6, Artikel 253, 1999. 263 Asser/Clausing & Wansink 5-VI 2010/270 and 275. 264 Asser/Clausing & Wansink 5-VI 2010/276; see also Kamerstukken II 1985/1986, 19 529, nr. 3, p. 22-23 (MvT).

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insurer cannot revoke the designation of that third party (unless otherwise declared under the policy terms). If the insurer would still do so, it results in a misfeasance. Under such a situation and the third party accepted its designation, the third party clause is irrevocable. A difference between the two articles is that under title 7.17, revocation is only possible for the policyholder in corporation with the insurer or the third party. This is contrarily to article 6:253 DCC which, under paragraph 2, states that revocation is possible at any time by either of the contracting parties, until the third party accepts the clause.265 This difference can be justified by the fact that general clauses in the insurance business are used which cover risks for third parties.266 In addition, unlimited possibilities of revocation are in conflict with the product of the insurer. The policyholder went to the insurer to obtain insurance. They agreed to cover risks of third parties as well under their agreement. It is because of this relationship that revocation should not be that easily.267 When damage materialized, revocation is no longer possible without the help of the third (and injured) party. This rule has been created in order to prevent the situation that the third party believed the damage was covered and when damage occurs, the third party notices it has been deceived.268

However, it has been decided by the Supreme Court of the Netherlands that a liability insurance policy generally does not contain a right on account of third parties.269 In this case the policyholder went bankrupt and the third party wished to claim damages directly from the insurer. The Supreme Court decided this was not possible as it would give the third party a personal right. Nevertheless, the agreement between the captive and the operating business can contain a right on account of third parties. It is uncommon, but not impossible to use. A third party then has a right to claim performance or otherwise invoke the contract after accepting that clause.

265

Asser/Clausing & Wansink 5-VI 2010/278. TH. H.J. Dorrestein, ‘De grondslag der derde-begunstiging bij schadeverzekering’, in: J.G. Sauveplanne, Verzekeringen van vriendschap (Dorhout Mees-bundel), opstellen aangeboden aan T.J. Dorhout Mees, Deventer: Kluwer 1974, p. 169-182. 267 F.R. Salomons, Verzekering ten behoeve van een derde. Zwolle: Tjeenk Willink: 1996, p. 187-189. 268 Kamerstuk II, 1999-2000, 19 529, nr. 5, p. 29 (NvW I). 269 HR 10 mei 1985, NJ 1985, 794. This judgment has been repeated in HR 3 April 1992, NJ 1992, 379 and HR 21 January 2000, NJ 2000, 189.

266

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Then, the following question is of importance: Why would a captive insert a clause which gives a right for a third party? From an economical point of view, there is indeed no reason to do so. However, from a legal point of view it is possible because as we have seen before the direct action is possible with a captive. When the captive wishes to regulate this possibility it can use these clauses.

5.4 Conclusion

Despite the discussion whether a captive is equal to a conventional insurance company or not, article 3:287 DCC is relevant for captives. There were several reasons that lead to this conclusion. Firstly, the arguments that lead to the creation of the article are related to the captive also of importance. Secondly, the requirements of the article are fulfilled by a captive. Finally, because of the layered structure of the Civil Code this article is more general than the articles of title 7.17 DCC. As a consequence, it is more easily applicable.

Regarding the direct action of article 7:954 DCC uncertainty existed whether this article is applicable for the captive or not. However, a captive offers similar to a conventional insurance company insurance contracts and it covers uncertain risks. In addition it pays out under similar circumstances as a conventional insurance company does. Finally, the Supreme Court of the Netherlands made clear that a captive should be fiscally treated as an insurance company. Therefore, the captive is similar to the conventional insurance company. In my view, title 7.17 DCC is thus relevant for the captive and thus the direct action can be used against a captive.

For those who remain sceptic about this possibility, I would like to ask the question how the situation would be if the captive offers coverage for mandatory insurance. For example, under some collective labour agreements the employer is obliged to obtain insurance for its employees.270 The captive has a choice: it could either seek coverage on the conventional market, or it could retain the risks under its own. When the choice is made to use the captive, it can be argued that additional requirements have to be met. As mandatory insurance are

270

F.R. Salomons, Verzekering ten behoeve van een derde. Zwolle: Tjeenk Willink: 1996, p. 11.

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enforced by law in order to protect the interests of third parties. In my view, when interests of third parties are involved, additional certainties have to be in place in order to compensate these differences. The captive could have chosen not to cover risks related to third parties. For these reasons, it can be argued that the direct action should be applicable for the captive as well. This view is strengthened by the fact that the same third party, with materialization of the same risk, would have had the option of the direct action if that risk was covered by a conventional insurance company.

From a more practical point of view, how should this direct action for a captive be effectuated? As mentioned before, a captive functions under the radar. However, this does not mean that they cannot be found. The DCB holds a register of financial institutions under its supervision.271 Some examples of direct captives in the Netherlands that offer coverage for general liability are ABN AMRO (a Dutch bank) and the NS (the Dutch Railroad Company). Because of this register third parties can be aware of the existence of a captive. Once awareness exists, the third party can demand payment to him from the captive. Then, no different treatment from the conventional insurance company exists.

How a captive should deal with this possibility for third parties is up to their own discretion. Captives have to create their own system of dealing with the privileged claims and direct actions of third parties when third party liability risks are covered within the captive. In order to do so, a clause that gives third parties certain rights can be inserted in contracts. By doing so, uncertainties vanish as a system is in place how to handle the privileged claim.

271

www.dnb.nl/en/supervision/index.jsp Choose the heading ‘Consumer and supervision’. Thereafter choose on the menu on the left side ‘Register of supervised undertakings’.

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6. Overall conclusion

As a consequence of rapid technological development new uncertain risks arise. These risks are described under Chapter one. As we have seen before, a captive is used when risks are too uncertain because the conventional market is only willing to offer coverage against excessively high premiums. The risks out of rapid technological development are highly uncertain and therefore captives can offer coverage. These risks are related to third parties as they are the ones suffering when a risk materializes. When a captive covers those risks it is thus insuring risks for third parties. I wondered how these third parties are protected under the law. First of all I described how it is regulated for a conventional company and secondly what protection of third parties already exists when dealing with a captive. In order to find out the Dutch Civil Code and the Financial Supervision Act were consulted.

From consulting the FSA we have seen that the requirements for obtaining a license are roughly the same for a captive and insurance company. The law stand less clear for the Civil Code. What becomes clear from Chapter five is that in my view article 3:287 DCC is applicable for captives when third party liabilities are bore by it. The law is even less clear regarding the applicability of the direct action for a captive. It is quit odd to realize that the captive insurance company is overall treated as a conventional insurance company when it comes down to the Financial Supervision Act and it can be seen as something different under title 7.17 DCC. I am glad that supervision on captives exists. And in my view, as you have seen under Chapter 4, it would be even better if the DCB would add protecting the interests of third parties to the list of supervision aims.

The question of importance is what the real difference is between a captive and an insurance company. Or, to put it in other words, how a captive should be seen: as an insurance company or as a risk-management tool? In my view, the difference is that a risk-management tool is used merely for internal purposes. It is thus only of importance within the group where the captive is a part from. Of course, an insurance company is used to manage risks as well, but this type of risk-management is external. It is (more) open and the world knows it is there. Externality can be an important aspect for a captive as well. This is the case with mandatory insurances. These - 93 -

insurances became mandatory for a reason: they are highly valued by the legislator. In other words, those types of insurance are of external importance. The values protected under mandatory insurance are the interests of third parties. Thus seen more broadly, a captive has to be seen like an insurance company when the interests of third parties are involved.

Personally, I see it like this: forming a captive as a risk-management tool is an excellent idea. No additional requirements should arise. However, this changes when the captives chooses to insure third party liabilities. Because then, the captive becomes of external importance. It is unacceptable that when something goes wrong, the third party is left with empty hands. Especially when the third party would have had an option to be redeemed if the risks were insured by a conventional insurance company. Thus, the third party should have the same possibilities at hand. This might seem harsh on the captive, but what is the justification to hide from third parties? Why should a captive be treated differently from the insurance company when it does exactly the same? In addition, the direct action can be used when a reinsurance captive is in place. Because then, the injured party can turn to the insurance company on the direct insurance market when using the direct action. The point of interest here is that the costs are bore by the reinsurance company. Would it not be odd to say that the direct captive is released from its duties simply because it has a different form? In addition, in other areas of the law a captive is treated equally to a conventional insurance company. This is true for the supervision based on the FSA, but also for the tax-treatment. Finally, a captive has policy, policyholders and claims. Just like a conventional insurance company has. The captive thus can be seen as a conventional insurance company. Because of this conclusion, title 7.17 DCC is of importance for a captive. Therefore, the direct action is applicable for the captive.

From a practical point of view, the direct action is a real possibility as information on the existence of captives can be found on the register of financial institutions under supervision of the website of the DCB. Once a third party is aware of the existence of a captive, the third party can demand payment to him from the captive. Then, no different treatment from the conventional insurance company exists.

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I would like to leave the option of how to deal with these possibilities up to the discretion of the captives. Captives have to create their own system of dealing with the privileged claims and direct actions when third party liabilities are covered within the captive. In order to do so, a clause that gives third parties certain rights can be inserted in contracts. By doing so, uncertainties vanish as a system is in place how to handle the privileged claim.

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Literature

Books

J.D. Adkisson, Captive insurance companies: An introduction to captives, closely-held insurance companies, and risk retention groups, Lincoln: iUniverse 2006.

A.J. Barille, The captive insurance company: An emerging profit center, Washington D.C.: Interstate Service Corporation 1979.

P.A. Bawcutt, Captives insurance companies. Establishment, operation and management, Cambridge: Woodhead-Faulkner 1991.

J. Birds, Birds’ modern insurance law, London: Sweet & Maxwell 2007.

A.G. Castermans (red.), Groene Serie. Bijzondere overeenkomsten, Deventer: Kluwer 2008 (elektronisch geraadpleegd via Kluwer Navigator).

P. Clausing, J.H. Wansink & C. Asser, Handleiding tot de beoefening van het Nederlands burgerlijk recht. 5. Bijzondere overeenkomsten. Deel VI. De verzekeringsovereenkomst, Deventer: Kluwer 2007.

C.C. van Dam, Verzekering naar komend recht, Preadvies voor de vereniging Handelsrecht en de Vereniging voor Verzekeringswetenschap, Zwolle: Tjeenk Willink 1995.

T.J. Dorhout Mees, Schadeverzekeringsrecht, Zwolle: Tjeenk Willink 1967.

P.J.W. Duffhues, Financiering, belegging en verzekering: Convergentie van financiële markten, Deventer: Kluwer 2006.

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M. Faure & T. Hartlief, Financiële voorzieningen na rampen in het buitenland, Den Haag: Boom Juridische Uitgevers 2006.

M. Faure & T. Hartlief, Nieuwe risico’s en vragen van aansprakelijkheid en verzekering, Deventer: Kluwer 2002.

F.G.B. Graaf & R.A. Stegeman (red.), Wet op het financieel toezicht: Tekst & Toelichting, Deventer: Kluwer 2007.

C.M. Grundmann- van de Krol, Koersen door de Wet op het financieel toezicht, Den Haag: Boom juridische uitgevers 2010.

Jac Hijma e.a., Rechtshandeling en Overeenkomst, Deventer: Kluwer 2010.

J.G.C. Kamphuisen e.a., Het nieuwe verzekeringsrecht: Titel 7.17 belicht, Deventer: Kluwer 2005.

J.Ev.M. Lippmann, Verzekering tegen wettelijke aansprakelijkheid, (diss. Leiden) 1951.

J.H. Nieuwenhuis e.a.(red.), Tekst en Commentaar Burgerlijk Wetboek, Deventer: Kluwer 2011 (elektronisch geraadpleegd via Kluwer Navigator).

S.J. Plemp, Verzekeringsrecht: naar titel 7.17 BW, Groningen: Wolters-Noordhoff 2005.

F.R. Salomons, Verzekering ten behoeve van een derde, Zwolle: Tjeenk Willink: 1996.

H.J. Scheltema, Algemeen deel van het schadeverzekeringsrecht (Vierde deel van M. Polak’s Handboek voor het Nederlandse Handels- en Faillissementsrecht). Vierde druk, bewerkt door F.H.J. Mijnssen. Alphen aan de Rijn: Tjeenk Willink 1991.

R.J. Schotsman (red.), Praktijkgids Wft: Financiële markten en ondernemingen onder toezicht, Amsterdam: NIBE-SVV 2009. - 97 -

L. Silverentand (red.), Hoofdlijnen Wft, Deventer: Kluwer 2010.

J. Spier e.a., Verbintenissen uit de wet en schadevergoeding, Deventer: Kluwer 2009.

A.J. Verheij, Monografieën privaatrecht: Onrechtmatige daad, Deventer: Kluwer 2005.

P.M. de Vries d’Amblée, Schadeverzekeringsovereenkomst in de Fransche Wet van 13 juli 1930, (diss. Leiden) 1983.

J.H. Wansink, De algemene aansprakelijkheidsverzekering, (diss. Rotterdam) Zwolle: Tjeenk Willink 1987.

J.H. Wansink, De algemene aansprakelijkheidsverzekering: een hernieuwde beschouwing in het licht van titel 7.17 BW, Deventer: Kluwer 2006.

J.H. Wansink e.a.(red.), Tekst en Commentaar Verzekeringsrecht, Deventer: Kluwer 2008 (elektronisch geraadpleegd via Kluwer Navigator).

Articles

M. Adams & D. Hillier, The effect of captive insurer formation on stock returns: An empirical test from the UK, Journal of Banking & Finance 2000.

Belastingdienst, ‘Captive: Geen invloed op fiscale winst verzekeraar’, Belastingdienst Amsterdam, 9 juni 2008, p. 10-13.

Van Bitterswijk, De Beursbengel oktober 1998.

E. Bloem, ‘Heerlijk heldere captives’, de Beursbengel maart 2009, p. 18-21.

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W.H. van Boom, ‘Hoe geprivilegieerd is het voorrecht op de verzekeringspenningen? Herkomst, werking en tekortkomingen van art. 3:287 BW’, WPNR 1944-6151.

W.J. van Breukelen e.a., ‘Specifieke vormen en technieken van riscofinanciering en risicooverdracht’ in: P.J.W. Duffhues (red.) Financiering, belegging en verzekering: Convergentie van financiele markten, Deventer: Kluwer 2006.

P. Clausing, ‘Onzeker voorval en onzekerheid’, in: M.M. Mendel e.a., Zekerheidshalve, Deventer: Kluwer 2003.

C.C. Van Dam & E.A. Waal, ‘De directe actie in titel 7.17 BW’, in: T. Hartlief & M.M. Mendel, Verzekering en maatschappij, Deventer: Kluwer 2000.

TH. H.J. Dorrestein, ‘De grondslag der derde-begunstiging bij schadeverzekering’, in: J.G. Sauveplanne, Verzekeringen van vriendschap (Dorhout Mees-bundel), opstellen aangeboden aan T.J. Dorhout Mees, Deventer: Kluwer 1974.

DNB Kwartaalbericht, ‘Financiële instellingen in beeld’, juni 2006, p. 77-83.

A.Ch.H. Franken & I. Giesen, ‘Het voorzorgsbeginsel: over nieuwe en onzekere risico’s’, AV&S 2010, 21.

A.C.F.J. Houben & R.H.J. Mosch, ‘Focus op risico’s in nieuwe toezichtvisie DNB’, Bank-en Effectenbedrijf, 2007-3, p. 8-10.

C.W.M. Lieverse, ´Richtlijn Herverzekering: Toezicht op herverzekeraars en entiteiten voor risicoacceptatie’, Tijdschrift voor Financieel Recht 2007, Nr. 11/12, p. 336-342. NARIM, ‘Captive: klem tussen wet en doelgroep: Kan het toezicht eenvoudiger?’, NARIM (Nederlandse Associatie van Risk en Insurance Managers) november 2009, www.narim.com/userfiles/File/vakgroep_captives.pdf

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A. Oosenbrug, ‘Fiscale aanvaardbaarheid van de captive: a never ending story?’, in: D.H. Offeren e.a. (red) Overbruggen (J.G. Kuijlra), Leiden 2010.

D.F. Parlett, ‘Defective Structures and Economic Loss in the United States: Law and Policy’, in: J. Neyers e.a., Emerging Issues in Tort Law, Oxford: Hart Publications 2007.

B.D. Pressman e.a., ‘Alternative liability insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006.

L.K. Shayne, ‘Captive Insurance Companies: your risk management angel’, The CPA Journal 19994.

Mr. N. Vloemans, ‘Events are in the saddle … the terrible ifs accumulate: Over onzekere risico’s en voorzorg in het aansprakelijkheidsrecht’, AV&S 2010, p.3-15.

H.M. Voetelink, VA 1980.

S. Wesseling & B. Boertje, ‘FIRM brengt risico’s bij financiële instellingen in beeld’, Bank- en Effectenbedrijf 2006-7/8, p. 18-21.

Case law

Supreme Court

Of America

Stearns-Roger Corp. v. U.S., 774 F. 2d 414 (1985).

Beech Aircraft Corp. v. U.S., 797 F. 2d 920 (1986).

Gulf Oil Corporation v. U.S., 89 T.C. No. 70 (1987). - 100 -

Of the Netherlands

HR 19 november 1982, NJ 1983, 711.

HR 10 mei 1985, NJ 1985, 794.

HR 21 augustus 1985, BNB 1985, 301.

HR 3 april 1992, NJ 1992, 379.

HR 11 april 1997, NJ 1998, 111 (Bike Brothers).

HR 2 mei 1997, NJ 1997, 597.

HR 31 oktober 1997, NJ 1998, 258.

HR 21 januari 2000, NJ 2000, 189.

HR 9 juni 2000, NJ 2000, 577.

HR 7 maart 2003, NJ 2003, 244.

HR 17 december 2004, NJ 2006, 147 (Hertel/erven Van der Lugt).

Court of appeal

Hof ’s-Gravanhage 19 oktober 2006, NJF 2007, 81.

Court of first instance

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Rb. ‘s-Hertogenbosch 18 april 2007, LJN BA3146.

Rb. ’s-Hertogenbosch 25 april 2007, NJ 2007, 286

Rb. Rotterdam 30 januari 2008, LJN BC6139.

Reports

OECD Tax Policies Studies No. 3, Taxing Insurance Companies, OECD Publications: 2001.

WRR-rapport, Onzekere veiligheid. Verantwoordelijkheden rond fysieke veiligheid, Amsterdam: WRR 2008.

Report of Marsh, Captive benchmarking report: Single parent captives, a global analysis, 2009, www.marshcaptivesolutions.com.

Report of Marsh, Single parent captive benchmarking: Capital and Collateral, 2010, www.marshcaptivesolutions.com.

Report of Business Insurance, Captive insurance report, 2011, www.businessinsurance.com/section/rankings.

Report of Marsh, Trends and performance: 2011 Captive Benchmarking, 2011, www.marshcaptivesolutions.com.

Other sources

Brochure Visie DNB toezicht 2006-2010.

Commission Communication of 11 May 1999 entitled "Implementing the framework for financial markets: action plan" COM(1999) 232. - 102 -

Internet

www.vermontcaptive.com.

www.dnb.nl/en/supervision/index.jsp

Kamerstukken

Kamerstukken II 1975/1976, 7729, nrs. 6-7 (MvA).

Kamerstukken II 1985/1986, 19 529, nr. 3 (MvT).

Kamerstukken II 1993/1994, 23 544, nr. 3.

Kamerstukken II 1999/2000, 19 529, nr. 5 (NvW I).

Kamerstukken II 2001/2002, 19 529, nr. 8 (NvW II).

Kamerstukken II 2001/2002, 28 373, nr. 3.

Kamerstukken II 2003/2004, 29 708, nr. 3.

Kamerstukken II 2004/2005, 29 708, nr. 10 (NvW).

Kamerstukken I 2004/2005, 19 529, nr. B (MvA I).

Kamerstukken II 2004/2005, 30 137, nr. 3 (MvT).

Kamerstukken II 2004/2005, 30 137, nr. 8 (NV II).

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Kamerstukken II 2005/2006, 29 708, nr. 19.

Kamerstukken II 2006/2007, 31 131, nr. 3 (MvT).

Kamerstukken II, 2007/2008, 31 131, nr. 6, p. 3-5 (NvW).

Kamerstukken II 2009/2010, 32 292, nr. 3.

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Exhibit A: Requirements for setting up a captive insurance company272

272

B.D. Pressman e.a., ‘Alternative liability insurance: Are you ready for a captive?’, Journal of the American College of Radiology 2006, p. 199.

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Exhibit B: article 2:31 FSA

1. On application, the Dutch Central Bank shall grant a licence as referred to in Section 2:27(1) if the applicant demonstrates that it will comply with the provisions arising from: a. Section 3:8 with regard to the expertise of the persons referred to in that section; b. Section 3:9 with regard to the properness of the persons referred to in that section; c. Section 3:10(1) and (2) with regard to the policy on the sound conduct of business; d. Section 3:15(1) and (2) with regard to the minimum number of persons determining the dayto-day policy and the place from which they perform their activities; e. Section 3:16(1) and (2) with regard to the control structure; f. Section 3:17(1) and (2) with regard to the operational structure; g. Section 3:19(1) with regard to the minimum number of members of the Supervisory Board; h. Section 3:20 with regard to the legal form; i. Section 3:53(1) to (4) with regard to the minimum equity capital; j. Section 3:57(1) to (4) with regard to solvency; and k. Section 3:70(1) with regard to the financial year. 2. If the application relates to an insurer having its registered office in the Netherlands in which a qualified shareholding is owned, the Dutch Central Bank, without prejudice to Subsection (1), shall grant a licence if the owner of the qualified shareholding has applied for a declaration of no objection in accordance with Section 3:95(2), and the Dutch Central Bank is of the opinion that the provisions arising from Sections 3:99 to 3:101 regarding the declaration of no objection are complied with. 3. The licence application shall state the sector or sectors for which the licence is requested and contain the data to be specified by or pursuant to a Decree. 4. On application, the Dutch Central Bank may grant a full or partial dispensation from Subsection (1), opening words and under (c), (d), (f), (g) or (k), if the applicant demonstrates that it cannot reasonably comply with those provisions and that the objectives which the sections listed in Subsection (1) seek to achieve are achieved in other ways.

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Exhibit C: article 2:26b FSA

1. On application, the Dutch Central Bank shall grant a licence as referred to in Section 2:26a(1) if the applicant demonstrates that it will comply with the provisions arising from: a. Section 3:8 with regard to the expertise of the persons referred to in that section; b. Section 3:9 with regard to the properness of the persons referred to in that section; c. Section 3:10(1) and (2) with regard to the policy on the sound conduct of business; d. Section 3:15(1) and (2) with regard to the minimum number of persons determining the dayto-day policy and the place from where they perform their activities; e. Section 3:16(1) and (2) with regard to the control structure; f. Section 3:17(1) and (2) with regard to the operational structure; g. Section 3:19(1) with regard to the minimum number of members of the Supervisory Board; h. Section 3:20 with regard to the legal form; i. Section 3:53(1) to (4) with regard to the minimum equity capital; j. Section 3:57(1) to (4) with regard to solvency; and k. Section 3:70 with regard to the financial year. 2. If the application relates to an insurer having its registered office in the Netherlands in which a qualified shareholding is owned, the Dutch Central Bank, without prejudice to Subsection (1), shall grant a licence if the owner of the qualified shareholding has applied for a declaration of no objection in accordance with Section 3:95(2), and the Dutch Central Bank is of the opinion that the provisions arising from Sections 3:99 to 3:101 regarding the declaration of no objection are complied with. 3. The licence application shall state the reinsurance activity, and shall contain the details to be specified by or pursuant to a Decree. 4. On application, the Dutch Central Bank may grant a full or partial dispensation from Subsection (1), opening words and under (c), (d), (f), (g) or (k), if the applicant demonstrates that it cannot reasonably comply with those provisions and that the objectives which the sections listed in Subsection (1) seek to achieve are achieved in other ways.

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Exhibit D: (Re)insurance lines underwritten by Captives over the year 2010

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