04 October 2011

Solvency II may be beneficial for captive insurers

Risk managers whose companies operate captives need to assess the strategic reasons for having a captive when considering Solvency II, the upcoming risk-based capital regulatory regime that will apply to large captives, insurers and reinsurers in the European Union, experts say.

While some may view the requirements of Solvency II, which will increase corporate governance and reporting requirements and may necessitate captives having higher levels of capital, as overly onerous, Solvency II should be beneficial if the reasons for operating a captive are sound, speakers said Monday during a session of the Federation of European Risk Management Associations forum in Stockholm.

Opportunity, not a burden

“There is no need to be alarmist”, said Markus Mende, managing director at Aon Global Risk Consulting in Basel, Switzerland. Solvency II will come “sooner or later”, he said, and if companies are really aware of what their captives are for and what risks they underwrite, then Solvency II could be an opportunity rather than a burden.

Mr Mende quoted Walt Disney, who said, “You may not realise it when it happens, but a kick in the teeth may be the best thing in the world for you”. Solvency II will help captive owners truly understand their risks, Mr Mende said. Captive owners should continue to join lobbying efforts to ensure their interests are protected in the final version of Solvency II, he added.

There remain some uncertainties about the treatment of captives under Solvency II, said Urs Neukomm, director of corporate strategic solutions at Zurich-based Swiss Reinsurance Co Ltd. There remain “grey areas” about the treatment of captives that underwrite third-party risks and liability risks, among other issues, he explained.

While captives have been focused on the Pillar 1 requirements of the Solvency II rules—which deal with capital and solvency—preparing for the Pillar 2 and 3 requirements—on financial reporting and governance—should be an important area of work for captives.

Equivalency

He also noted that while Bermuda, Japan and Switzerland are developing equivalent regulatory regimes to Solvency II, those rules are “equivalent with caveats”. Bermuda, the largest captive domicile in the world, intends to exclude captives from its rules, he said citing an example.

Other domiciles, including Guernsey and the Isle of Man, have decided not to aim for equivalence with Solvency II. This could prompt some captive owners to move or set up captives there, he said. But, Mr Neukomm said, if captive owners properly apply Solvency II and its enterprise risk management elements, they probably will see what a “wonderful tool” captives can be.

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