Experts say still time to alter captives rules

Feb 14, 2011

The following article was published in Business Insurance on February 14, 2011:

Experts say still time to alter captives rule 

By Sara Veysey

BRUSSELS—Captive insurance company owners and managers still have time to influence the shape of Solvency II, the risk-based capital regulatory regime slated for introduction in 2012, experts say.

Results of the fifth quantitative impact study, a test that was run last fall to identify issues and potential impacts of Solvency II rules, will be published in March by the European insurance regulator, the European Insurance and Occupational Pensions Authority.

QIS 5 simplified the ways captives would be treated under Solvency II, provided they met certain criteria. Those criteria include having all beneficiaries of the captive being legal entities of the captive parent’s group and that insurance obligations of captives that directly write coverage not be related to compulsory third-party liability coverage.

But the exercise still was extremely onerous for captives and akin to “using a sledgehammer to crack a nut,” said David O’Connor, a senior consultant at Towers Watson & Co. in Dublin.

He said the model for QIS 5 was very complex and not suited to captives, which typically have fairly simple business models and capital requirements.

Mr. O’Connor said he believes captives would benefit from an “extreme simplification” of their capital requirements under the eventual rules laid down by Solvency II.

He said captive owners and managers still have time to lobby the European Union to seek changes.

Pierre Sonigo, director general of the Brussels-based Federation of European Risk Management Assns., recently wrote to risk managers in Europe on the subject of QIS 5 and Solvency II’s treatment of captives.

He said FERMA would await detailed feedback from EIOPA on the QIS 5 exercise before deciding how best to direct its efforts to ensure that captives are treated fairly and in proportion to their size and complexity under Solvency II.

He said, however, that based upon a sample of captives from Dublin and Luxembourg that took part in QIS 5, about 13% of captives likely would be deemed insolvent under Solvency II rules.