Eiopa backs proportionality for captives in Solvency II Opinion

The European Insurance and Occupational Pensions Authority (EIOPA) has stepped in at a key point for the development of new captive markets in Europe, publishing its Opinion, related to Solvency II, that supports the convergence of supervisory expectations to create a level playing field within the EU. As the captive landscape in Europe changes, with territories such as France, Italy and Spain and potentially others all look to bring in captive-related legislation, EIOPA is clearly keen to ensure a cohesive and harmonised approach to regulation and a level playing field when it comes to supervision. The Opinion focuses on the supervision of captive (re)insurance undertakings, with a particular focus on intra-group transactions (notably cash pooling), the consistent application of the prudent person principle, and governance (in particular key functions and outsourcing requirements). It is aimed at national competent authorities (NCAs) and outlines the supervisory expectations while taking into account the specificities of captive (re)insurers’ business models. “The Solvency II Directive takes account of the specific nature of captive insurance and captive reinsurance undertakings. As those undertakings, which are of relevance to the industry as a method of risk transfer, only cover risks associated with the industrial or commercial group to which they belong, appropriate approaches should be provided in line with the principle of proportionality to reflect the nature, scale, and complexity of their business,” said EIOPA. It added: “While further convergence of supervisory practices is needed, NCAs may take into account national specificities of the captive (re)insurance sector when implementing the principles included in this Opinion.” The Opinion looks at three areas: cash pooling, the prudent person principle, and key functions. On cash pooling, EIOPA said: “NCAs should ensure that (re)insurance captive undertakings recognise and classify in the Solvency II balance sheet the asset and liability descriptions according to the economic substance of the cash pooling arrangement, and also apply the proper calculation of the solvency capital requirement (SCR).” It added: “NCAs should ensure that captive (re)insurance undertakings are able to provide at any time information about cash pool arrangements in sufficient detail to clearly identify the related asset classification (e.g. cash pooling giving rise to deposits or cash or to intercompany loans) and the legal basis of the arrangement.” The Opinion also noted that NCAs should ensure that the administrative, management, supervisory board as a whole possesses the necessary seniority, qualifications, competency, skills and professional experience, adding: “There is no exception from this requirement for captive (re)insurance undertakings.” EIOPA said key function tasks can be outsourced, “however, the captive undertaking should designate a person within the undertaking with the overall responsibility for the outsourced key function who is fit and proper and possesses sufficient knowledge and experience regarding the outsourced key function to be able to challenge the performance and results of the service provider”. When there is outsourcing, the NCA should ensure that adequate safeguards are in place to mitigate any conflict of interests (for example, brokerage services performed by the captive manager) or operational risk arising from such outsourcing, said EIOPA. It added that NCAs should ensure that in the case of multiple services being provided by the same service provider or captive manager from captive undertakings, the segregation of duties is clearly agreed and documented. “Given the high degree of outsourcing operated by captive (re)insurance undertakings, NCAs should ensure that the initial and ongoing due diligence on the service provider operated by the captive on the service provider is embedded in strong processes and procedures, which should be made available to the NCA upon request,” said EIOPA.

Eiopa backs proportionality for captives in Solvency II Opinion

Adviser to the EC wants more harmony in member states' supervision of captives

Want to read this article?

Read Next

ADB advises Kazakhstan to create disaster risk carrier

Concerns over level of earthquake cover in Taiwan

MSIG Asia and RiskPoint team up to tap huge APAC renewable market

Cloud providers pose ‘clear and immediate’ systemic risk, warns Tokio Marine HCC

Allianz Commercial names new UK head

ADB advises Kazakhstan to create disaster risk carrier

Concerns over level of earthquake cover in Taiwan

MSIG Asia and RiskPoint team up to tap huge APAC renewable market

Cloud providers pose ‘clear and immediate’ systemic risk, warns Tokio Marine HCC

Allianz Commercial names new UK head

Keep yourself informed

Sign up for Commercial Risk’s newsletters

Want to read this article?

Read Next

ADB advises Kazakhstan to create disaster risk carrier

Concerns over level of earthquake cover in Taiwan

MSIG Asia and RiskPoint team up to tap huge APAC renewable market

Cloud providers pose ‘clear and immediate’ systemic risk, warns Tokio Marine HCC

Allianz Commercial names new UK head

Related Articles

Keep yourself informed

Sign up for Commercial Risk’s newsletters