Captive insurance - An old solution for a new challenge in the aviation leasing sector?

The Russia-Ukraine conflict and the consequent disputes around claims under aircraft insurance policies has shone a spotlight on insurance in the aviation sector.

As well as ongoing litigation in relation to the correct interpretation of existing insurance policies covering the relevant seized aircraft, aviation insurance policies around hull and excess war cover may attract significantly higher premiums in the years to come.

Against this background, aircraft lessors and other parties may wish to consider the use of a captive insurer to manage both cost and the terms of coverage for aviation policies. While it’s a concept that has been around for some time, it may now be very relevant for the aviation leasing sector.

A captive insurer is a regulated insurance policy issuer which is established within a broader corporate group to write policies which will cover risks relating to the business of that group. Captive insurers will generally be capitalised to enable them to write the relevant insurance policies, but will also look to access the reinsurance markets in terms of managing and mitigating the risks that they assume from time to time.

In the current environment, captive insurers have the potential to provide a cost-effective means of managing hard-to-ensure or emerging risks, and to access the reinsurance market. For example, a captive insurer may retain some of the “softer” risks being those that are less likely to give rise to losses and reinsure its other risks. Alternatively, a captive insurer can capture back some of the risk and profit covered by the group’s third party insurers.

Ireland has a long history in relation to the establishment of captive insurer vehicles, with the first vehicles being established in the late 1980s. Since then, the CBI has issued a comprehensive set of rules around the process of obtaining an authorisation for an Irish captive insurer.[1]

In seeking an authorisation from the Central Bank of Ireland (CBI), any captive insurer applicant does need to follow an application process. The process involves completion of application documentation covering the structure of the captive insurer with a particular focus on risk management and governance and personnel structures. In this regard, the requirements proposed by the CBI in relation to captives are less onerous than those applicable to general commercial insurers and the captive will not be subject to the same level of regulatory supervision as would be the case with a general commercial insurer.

It should also be noted that the CBI will expect the parent company of the captive to have some expertise in insurance matters to effectively supervise the captive. We believe that this should be manageable in the aviation leasing sector, at least where aviation lessors already maintain their existing in-house insurance expertise, for example managing their existing insurance programs.

It should also be noted that the existence of the captive insurer may complicate mergers and acquisitions or restructuring activity within the group as some acquisitions will trigger CBI consent requirements.

The A&L Goodbody insurance team is one of the leading insurance legal teams in the country and has over 30 years of experience in establishing and advising captive insurance vehicles.

If you would like more information in relation to Irish captive insurance processes or captive insurers or the application process, please contact any members of our insurance team, or your usual contact within the A&L Goodbody Aviation Finance team. Our details are set out below.

[1] Under Irish law any captive insurer needs to obtain an authorisation under the European Union (Insurance and Reinsurance) Regulations 2015, which implement the Solvency II Directive 2009/138/EC in Ireland.