The captive insurance industry must speak out about the potential threat of Solvency II and press for application of the proportionality principle, says Valerie Alexander
Solvency II’s proposed formulas create far more stringent capital requirements for captives than for commercial insurers. The Pillar 2 requirements, if applied without simplification, will significantly increase the administrative burden.
Solvency II is not just an issue for EU companies but also for those who have captives in non-EU domiciles such as Bermuda, Cayman and so on. These domiciles are currently considering whether to adopt an equivalent regulatory regime. So far, most are taking a ‘wait and see’ approach, with the exception of Bermuda, which has publicly consulted on equivalent status for part of its reinsurance industry.
Captives are important risk management tools for major multinational companies, often insuring risks that cannot be covered in the external market. If companies find that the cost of compliance with Solvency II proves too high, captives will be shut down, leaving these risks uninsured and exposing the company’s balance sheet to unmitigated risks.
Unfortunately, we do not have sufficient data for captives and small insurance companies to confidently predict what will happen. It is therefore vital that captive owners take part in the fifth quantitive impact study (QIS5), which will begin in August, so that Pillar 1 data is available. This is the last chance for captive owners to be heard.
The European Captive Insurance and Reinsurance Owners’ Association (Eciroa) – with Ferma, Marsh and Aon – has recently received some encouraging feedback from the European Commission. The application of the proportionality principle is crucial for captives and these associations have been asked by Karel Van Hulle, head of the insurance and pensions unit in the EU Commission, to provide proposals on how proportionality can be applied to captives. Eciroa attended the QIS5 stakeholders meeting at the end of April and is working on a best practice guide to help captive owners comply with Pillar 2.
Some further positive news for those with captives in Ireland is that Matthew Elderfield, the Irish regulator, has promised a fair and proportional approach. Elderfield has recognised that the risk profile of captives is “significantly different” from other insurers and has stated that regulators will “have the chance to be flexible”. But how the proportionality principle will be applied in practice is uncertain.
There is still a lot to be done. We will continue pushing the heavy boulder up the hill but if we are to get it to the top, we need more captive owners to put their weight behind it. ¦
Valerie Alexander is UK head of corporate insurance for Deutsche Bank – one of the founding members of Eciroa