Un-captivated by Solvency II

Concerns over the implementation of Solvency II are focused on the more stringent capital requirements and the treatment of captives as regular insurance companies. Under the new regime the capital requirements might eliminate certain insurers unable to diversify their risks leading to increased prices or a shrinking of the products available on the market.

The question of how to calculate the solvency capital requirements is of particular concern as the standard model (as defined by the regulations) may be unsuitable for captives given their specialist nature, but to apply a bespoke internal model requires the approval of the relevant competent regulatory authority which will be costly and time consuming. The European Captive Insurance and Reinsurance Owners Association believe as many as 40% of captives could be forced to close because of the capital charges imposed by Solvency II, unless the rules for captives are relaxed to reflect the fact that they are not normal insurance companies. The price of a move from a volume based capital regime to a risk based capital regime leads to heavier overall capitalisation obligations for captives.

Smaller captives are also concerned over the more onerous reporting requirements which are designed with large multinational insurance companies in mind not captives with limited resources.

In 2012 Bermuda elected to seek third country equivalence to Solvency II and successfully lobbied the European Insurance and Occupational Pensions Authority to secure the bifurcation of its regulations. It remains to be seen whether other jurisdictions will follow suit but that appears to be unlikely at present.

At present offshore jurisdictions such as Guernsey and the Isle of Man will not be obliged to comply with Solvency II and most seem wary of voluntarily applying it given their concerns over the practical effect of its implementation.

The offshore jurisdictions point to their compliance with the International Association of Insurance Supervisors’ Core Principles released in 2011. The Core Principles are said to be similar to Solvency II but more proportional. Around 140 countries under IAIS will comply with the Core Principles whether they are Solvency II equivalent or not. What is interesting is that a key aim of the Core

Principles is to promote global consistency in insurance regulation which may mean that in the long term Solvency II becomes the commonly accepted standard worldwide. Anecdotal evidence suggests that fewer captives are establishing themselves in Solvency II jurisdictions instead choosing to set up offshore to avoid the additional regulatory burden. Re-domiciliation looks set to be a hot topic for consideration among captive managers looking forward.

Risk and insurance associations at a European level continue to lobby the EU over the treatment of captives and it remains to be seen whether they will be dealt with differently once Solvency II is finally implemented. It is clear that five years after its announcement significant concerns still exist within the industry and captive managers will monitor developments with interest. CMS is uniquely placed within Europe to assist in preparing for the implementation of Solvency II and the effect on the ultimate insureds as well as the captives.