Captives will receive simplified and proportionate treatment under Solvency II–Van Hulle

Mr Van Hulle also told CRE that the Commission has listened to industry concerns about the supposedly excessive weighting given to natural catastrophe lines of business in the draft to date and, coupled with improved data provided by the industry, this should lead to a more reasonable treatment that does not threaten to deliver big price hikes for big industrial customers with high risk exposures. And the Commission man said that he and his team are working hard to try and ensure that a recent initiative from the European Parliament that could make it very difficult for any country outside of the European Union to obtain equivalent status, and could therefore slash the availability of capacity for large risks, will not happen.hideMr Van Hulle’s words, given in an interview last week in Brussels, will be warmly welcomed by European captive owners who have become increasingly concerned about the apparent lack of assurance from Brussels that captives would be offered special treatment under Solvency II, as envisaged under the original Framework Directive. Many captive owners interviewed by CRE in recent times have expressed fears that pressure from the insurance company lobby that regard them as competition, and the lack of time available to the European Insurance and Occupational Pensions Authority (EIOPA) and the EC as they prepare for the final stages of the Directive would mean that their special position would be overlooked. The response of supervisors quizzed by CRE also suggests that without any clear direction from the Commission or EIOPA some of them feel they would have to regulate captives in the same way as standard commercial insurers. But Mr Van Hulle stated firmly that the principle of proportionality was clearly expressed in the Framework Directive and that supervisors would have to act upon this accordingly. “This has already been clarified,” Mr Van Hulle told CRE when asked his view of the apparent lack of certainty in the market and among supervisors about the way in which captives should be treated under Solvency II. “We have worked a lot with the captive industry and provided detailed feedback on this area and we have adapted to the position of groups such as ECIROA (the European Captive Insurance and Reinsurance Owners’ Association). It must be recognised that specific risks for captives, such as concentration risks and the calculation of certain risks need to be recognised as lower for captives and therefore applied in a lighter way to the rest of the market by the supervisors. This has been explicitly included within the Level 2 draft and there are a number of specific references to captives within the document and how they should be treated in a more simplified way in certain areas,” said Mr Van Hulle. “Also, and there is no doubt about this, the national supervisors must apply a proportionate approach to captives and other simpler and smaller insurers because this is clearly stipulated in the text of the Framework Directive. As ever the proof of the value of the cake will be in the eating. It must be recognised that this was not an uncontested area of discussion,” he continued. “Some parts of the commercial insurance industry were not particularly pleased with the concept of treating captives in a simplified and proportionate way because they regard them as competition. Most people agree that captives have a valid role to play and should continue to do so, but at the same time it has to be accepted by the captive community that standards have to be applied to them as with the rest of the market. But yes, we have allowed simplifications for captives in the standard formula and have provided specific simplifications,” he added. Europe’s risk and insurance managers have also become increasingly worried about the wider impact of Solvency II on the ability and willingness of their core industrial insurance carriers to offer them affordable capacity after the new regime is up and running in 2014. One specific concern expressed by the reinsurance community to CRE during the recent market meetings in Monte Carlo and Baden Baden is the proposed level of charges for catastrophe business because they still seem to be too tough and will potentially drive capital away from higher risk and catastrophe prone lines. Mr Van Hulle said that this problem had been recognised and that progress had been made. “We have been working for the last ten months or so with EIOPA and the industry to achieve better calibrations for non-life risks. The reason for this was that we simply did not have the data available because in the past some member states and insurers were reluctant to give us the data. Now we have the data and the calibrations are better and reflect the whole insurance market in Europe, not just certain areas for which the data was available. So the capital charges are now more in line with the actual situation in Europe. Therefore insurance buyers should not worry about whether the risks are accurately charged for,” said Mr Van Hulle. The Commission man would not go so far as to promise corporate policyholders that capacity offered would not shrink and insurance prices would not rise as a result of Solvency II, because that depends on a wide range of factors. “Whether this will lead to a reduction in premiums is not something I can make any useful statement about. I cannot make predictions or offer guarantees about the prices charged to the customers because the insurers have to price their risks in accordance with the mix of business and nature of their portfolios and cost bases,” he said. “They have to look at all the risks that they carry and work out the pricing accordingly. So the particular type of business and the way it is organised may or may not lead to higher capital charges. What I can say is that the industrial insurance market does tend to be dominated by big international groups that have well diversified books of business and which will use internal models rather than the standard model. So there is the possibility that they can operate with lower capital charges which might lead to lower premiums for customers,” continued Mr Van Hulle, referring to the fact that those companies that have their own internal models approved by supervisors will face lower capital charges than those companies that rely on standard models produced by the supervisors. Gold sponsors of the Risk Frontiers event in Frankfurt: Silver sponsors:

Captives will receive simplified and proportionate treatment under Solvency II–Van Hulle

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