A more proportionate approach to regulating captives is needed, particularly in the hard market, says risk association

The Federation of European Risk Management Associations (FERMA) says that European insurance regulation should automatically treat captives as low-risk undertakings unless there are clear reasons to apply the full criteria.

This comment is at the heart of Ferma’s response to the latest consultation exercise on the revision of Solvency II by the European Commission.

The European risk and insurance association welcomes proposed changes to Solvency II that would strengthen the concept of proportionality and in particular the creation of a new classification of “low-risk profile undertakings”.

However, it says there is still room to improve the proportionality of captive regulation. “We call for captives to be treated automatically as low-risk profile undertakings, unless, for example, the captive poses a systemic risk or has been in breach of its solvency requirements.”

This amendment would further reduce complexity for small and less risky insurers, specifically captives, which is one of the five main problems that the Commission addresses in its review of the rules. It would also streamline captive regulation for national supervisory authorities.
Ferma has reiterated its belief that the solvency of a captive rarely has any impact in the insurance market, but that they are a valuable part of the risk management strategy of many companies.

“They provide European enterprises with an alternative form of risk transfer, which is crucial in the current hard insurance market conditions.”

European corporates have been increasingly turning to captives as a source of (re)insurance capacity and risk management information in the face of a hardening insurance market.

In the 2020 Ferma Risk Manager Survey, 27% said they would use an existing captive for hard to place risks, compared to only 1% in 2018, and 16% were considering the creation of a new captive.

It anticipates the 2022 survey will show the trend has continued and possibly accelerated, with concern among risk managers not just about prices but about availability of capacity for certain exposures such as cyber risks.

FERMA concluded its submission with an acknowledgement of important progress on proportionality in the current proposals on Solvency II.

“However, we are of the firm belief that more should be done to make Solvency II truly risk-based and proportionate. We say this as insurance buyers but also as users of captives during hard market conditions, and also amid growing questions over the ‘insurability’ of certain risks, such as those linked to climate change.”

”Options for risk transfer are, therefore, more important than ever. FERMA looks forward to contributing our unique expertise to the political discussions on Solvency II.”