Pirelli’s people focus
Vicky Beckett
Having shunned Bermuda and the Dutch Caribbean, Pirelli keeps two captives, domiciled in Switzerland and Ireland. “At the moment, both markets are very
interesting,” says Jorge Luzzi, Pirelli’s group risk management director and newly-elected president of the Federation of European Risk Management Associations (FERMA).
Luzzi is an old hand in the world of risk management, having been Pirelli’s captive owner since 1988.
He runs the Irish captive, Pirelli Reinsurance Company, and Swiss-based Pirelli Group Insurance Company. Across the two captives, Pirelli writes property damages,
business interruption, general and product liability, recall, inland marine, international transport, international employee benefits and credit insurance.
Luzzi says one benefit of the Irish captive is being able to access the reinsurance market. Luzzi argues that taking part of the risk with a reinsurance captive helps
the wider company, for example in the speed of paying claims, knowing where money for premiums is going and knowing that the recessionaires have good capacity and security.
Having captives means making claims is not in Pirelli’s interest, Luzzi says: “We try with all our energy to not have claims. We invest a lot in loss
prevention.” Cost is also one of the benefits of having captives for Pirelli. Luzzi explains: “Everybody knows when you increase the retention of the captive you eliminate frequency
claims to be paid by the commercial market. If you go to the market with a big retention, they provide you with a better rate.”
Credit insurance
“The biggest business for Pirelli’s captives is property damage and business interruption,” says Luzzi. However, this year the captives are working
on writing a credit insurance programme. Luzzi says using captives for writing credit insurance is a product of the credit crisis. “In a sense, we provide credit to the distributors of our
products, not credit in terms of money, but we give products to them and they pay us afterwards.” Writing credit insurance into the captive will allow the company to monitor the risk, do
research and go to the market with excess of the credit that Pirelli provides to its distributors.
Developing people-orientated claims
“We are expecting a big development in everything related to people, such as personal accident, workers’ compensation, employers’ liabilities, life
insurance – all of these we expect to go into thoroughly in the next few years,” says Luzzi, who adds that the captive team has many ideas in relation to human resources.
For example, he intends on looking into the costs of recruitment for senior management. “All of these things cost a lot of money and could be part of insurance
or reinsurance.” The captive already provides healthcare to all employees in countries where a good state healthcare system is not available, such as Brazil. Luzzi intends on developing this
further, reviewing the captive’s retention.
“If Solvency II generates fusions of medium-sized companies with big companies in a big consolidation of insurers, this could generate a
reduction of capacity in the market”
Domiciles
Luzzi believes there are benefits to having a captive in both Ireland and Switzerland. “The Irish market is interesting because we have the opportunity to
insure companies in the EU, and utilise reinsurance and fronting insurance when necessary. Switzerland is very international. It’s already applying a system very similar to Solvency II. The
intention is, for the time being, to have a presence in both markets.
“We had a captive for a period in Bermuda and for another period, several years ago, we were in the Dutch islands in the Caribbean.” However, he
believes the situation is very difficult when the country of the parent company and the domicile does not have business-friendly agreements such as TIEAs.
F1 & reputational risks
Pirelli is the official tyre supplier of Formula 1 (F1) racing. The brand’s presence on TV screens around the world at every F1 race is good advertising, but it
also increases reputational risk. On whether Pirelli writes this into the captive, Luzzi says: “Not yet. This is something that we are working hard on at the moment and we will most likely
have reputational risk written in to the captive in the future.”
Luzzi says if tyres are not provided on time due to logistical faults it could be very dangerous. We are working very seriously as a risk management department on
this, not only with insurers but also with other systems of contingency planning. We are looking into writing coverage at the moment and the involvement of the captive will be a consequence of
that.”
Supporting Pirelli
Luzzi says the captive is not seen as an insurer or reinsurer trying to do business but part of the Pirelli team, worldwide. He says: “Everything that is done
is not to make profit in the captive but to make easier the work of the company. Primarily the captive is a financial tool, but it is also a loss prevention tool.”
Working from Pirelli on the captives, there are approximately 10 people in Italy, two in the United States and three in Brazil. He says: “We have a third party
that is a broker supporting the captive’s activity. And I believe now, more or less, there are four people from the broker that are dealing with our captive.”
Solvency II as president of FERMA
As the newly-elected president of FERMA, Luzzi has been working towards Solvency II. He says the FERMA board are doing this in a very detailed manner, slowly
analysing the potential impact. Luzzi says: “One of the worries generated by Solvency II is the impact of a potential reduction of capacity in the market. I am not talking now as a captive
owner, but as a client. If Solvency II generates fusions of medium sized companies with big companies in a big consolidation of insurers, this could generate a reduction of capacity in the market
and as a consequence an increase in cost or a harder market.” However, he believes the main concern is maintaining the quality of insurers and reinsurers through the economic crisis.
“There is a delicate equilibrium between the need for security but to not go so far ahead as to destroy or abuse the captive market that is a very small group
of companies,” says Luzzi. FERMA is dealing specifically with cases understood to be complicated. But, he says, ultimately Solvency II will be a positive thing for the industry. FERMA is in
regular communication with the authorities, discussing concerns and benefits of the directive. Luzzi thinks there are many of the latter.
Keeping Pirelli compliant
In terms of Pirelli’s captives, Luzzi says the risk management team is doing “everything” to prepare for Solvency II. The Irish reinsurance captive
will be applying the directive, while the Swiss captive is applying a system very similar to Solvency II, of which Luzzi says: “In some cases I think its approach is the strongest.” He
added: “I believe that we are OK, we are doing well and that is the objective.”
As captive owner of an Italian company, Luzzi says compliance to the tax regulations is a big issue. “It is necessary to demonstrate that the captive has a
purpose other than reducing tax payments and being an instrument of control, beneficial to the company’s insurance system and for the prevention of claims. The times when a captive was used
specifically for tax reduction finished a long time ago. The Italian authorities are very serious about controlling this.”
The future of captives
Luzzi predicts that Solvency II will have the biggest influence on the future of captives. “We may have a reduction in the quantities of captives in Europe. I
don’t think that will happen in big or medium-sized companies.” However, he says small captives used for a single risk or those used for tax reduction will find it very difficult to
survive under the new regulations.
Luzzi also believes the need for specialists is more important than it was in previous years when recruiting for the captive. “The captive owner must understand
it needs people working on it daily with specific knowledge about reinsurance and insurance. Using people from different sectors when the knowledge in our sector is so specific could be
dangerous.”
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