ECIROA presents case for proportional treatment of captives to commission

The guidelines are well timed as the commission is reportedly currently working on its own set of guidelines for captive managers and owners to help them work out how to implement the planned new capital adequacy and reporting regime. And the European Insurance and Occupational Pensions Authority has just published the findings of the QIS5 study into the impact of Solvency II as it currently stands [see related story]. The QIS5 findings show clearly that the current rules would make life difficult for smaller, simpler insurance companies such as captives. The commission responded by calling for a less complex approach and this offers hope that the thorny issue of proportional treatment by which simpler and less onerous rules are offered for smaller companies may finally be clarified and the position of captives made less perilous. hideCaptive owners and managers all over Europe have become increasingly concerned over the last couple of years about the lack of clarity on how Solvency II should be applied to captives. Many experts were even worried that a hard-line version of Solvency II would force the closure of many captives or migration out of the European Union. This fear was fuelled by the absence of specific details on captives given by the commission and EIOPA that many captive market experts feared could mean that the commission was about to abandon its initial commitment to grant captives proportional treatment as outlined in the original framework directive. Under a proportional regime national supervisors would be granted much greater flexibility to decide how they feel the new solvency rules should be applied. Crucially it would enable them to adopt a softer stance on capital and reporting requirements for simpler structures such as so-called pure captives that only write parent company risks. ECIROA gave its best practice guidelines to the commission at the end of February and hopes that it will use it to help draw up its own guidelines for captive owners and managers. The document includes suggestions on best practice for governance, risk management systems, actuarial functions and outsourcing that would hopefully help convince EIOPA and the commission that a truly flexible and proportional approach would work for captives. Günter Dröse, president of ECIROA and head of insurance management at Deutsche Bank in Frankfurt, told Commercial Risk Europe that he hopes to discuss the matter shortly with Karel van Hulle, head of the Solvency II project at the commission. The commission will need data and hard evidence to persuade it and EIOPA of the need and justification for ‘special’ or simplified treatment of captives and has repeatedly stressed the need for higher industry participation in its data gathering quantitative impact studies. The commission was pleased that it drew much higher participation for QIS5 than previous efforts as 70% of European insurers took part in the study. But ECIROA said that the participation of captives could be higher and was to some extent not clear enough. It has therefore carried out further analysis of the impact of Solvency II as currently proposed amongst its 100-plus members to help support the case for a more flexible approach to the market by the supervisors. “Unfortunately it is questionable whether the QIS5 results will provide useful data for the captive industry. Many captives will be included in the overall results (for insurance companies) as they did not identify themselves as captives when the QIS5 was submitted,” stated ECIROA. “Also it seems that very few captives have used the captive simplifications either because they could not meet the criteria for use (which are extremely restrictive), they did not consider the simplifications more beneficial than the standard formula or due to the extra cost involved. Furthermore, some completed the QIS5 but did not submit the results to EIOPA and some are only now going through the process,” continued the association. ECIROA therefore concluded that if captive owners hope to be in a position to justify their demand for a simplified and proportionate approach then more data will be needed and the only way to achieve this is to pool the results. Mr Dröse told CRE that ECIROA is currently preparing a single template for the figures that it has gathered from members and will present this to Mr Van Hulle in this pooled way to help explain why ‘captives are different’. “The solvency rates of the captives surveyed range from 19% to 425% and the local regulator needs the flexibility to deal with that diversity and supervise captives one by one. This is what we want to explain to the commission,” explained Mr Dröse. Captive owners and managers are not just worried about the levels of capital that may be needed under Solvency II. They are also worried about the levels of transparency required by Solvency II under the governance and reporting rules labelled Pillar II and Pillar III. “The other area which still remains a mystery is what will be required by the ORSA (Own Risk Solvency Assessment) which may lead to additional unnecessary work for captive owners. The other Pillar II requirements that are strictly applied to captives without a proportionate approach will also be burdensome and costly. Many captives already have risk management processes in place which should be sufficient to meet Pillar II requirements but these processes may not be documented,” explained Mr Dröse. “This is where we come back again to the principle of proportionality which should allow sufficient flexibility for regulators to be pragmatic when assessing captives. The best practice guidelines for captives will help captive boards to ensure compliance but in a manner that is appropriate for their business. These guidelines have been presented to the EU for discussion and will hopefully be accepted,” continued Mr Dröse. Above all ECIROA continues to ask why captives should be required to disclose sensitive information about claims and the like when the only people who would be interested in such information are competitor companies. “We don’t want to report or disclose such information,” said Mr Dröse. “Why? Because if an energy company discloses a list of potential claimants the only people who would need that would be the competition. Yes you have to disclose such information to the regulators but there is not public interest,” he added.

ECIROA presents case for proportional treatment of captives to commission

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