EIOPA consults on captive supervision ahead of SII review

Good news for Europe’s captive owners came just before they met in Antwerp for the Ferma Seminar as the European Insurance and Occupational Pensions Authority (EIOPA) gave details of a public consultation about the supervision of captives designed to bolster the principle of proportionality ahead of its review of Solvency II. The consultation is on EIOPA’s opinion regarding the supervision of captive (re)insurance undertakings, with a particular view on intra-group transactions, the prudent person principle and governance. EIOPA explained that this draft opinion is addressed to supervisors and outlines the supervisory expectations while taking into account the “specificities” of a captive (re)insurer’s business model. EIOPA is clearly in agreement with captive owners and their representatives, such as Ferma and the European Captive Insurance and Reinsurance Owners’ Association (ECIROA), that national insurance supervisors across Europe need to take a more consistent and proportionate approach to the supervision of captives. “The opinion aims at facilitating a risk-based and proportionate supervision of captive (re)insurance undertakings and further support the convergence of supervisory expectations in the context of creating a level playing field within the EU. The opinion sets out supervisory expectations in several areas, including intra-group transactions (especially cash pooling), the consistent application of the prudent person principle as well as governance-related aspects in connection with key functions and outsourcing requirements,” said EIOPA. “The opinion seeks to ensure a high-quality and convergent supervision of captive (re)insurance undertakings and is part of EIOPA’s priorities as defined in the 2022 and 2023 Supervisory Convergence Plans,” it added. The European supervisory body has explicitly stated that it wants to see a more consistent and coherent approach to captives across the EU and is using this latest initiative to underline this goal within the wider context of the Solvency II review. “After the proposal for a more proportionate treatment of captives insurance and reinsurance undertakings in the context of the review of Solvency II, EIOPA aims at using the opinion as a set of recommendations to NCAs [National Competent Authorities] on how to supervise some specificities of captives insurance and reinsurance undertakings where divergences of practices have been found, such as governance-related aspects for the outsourcing of key function, treatment of cash pooling arrangements, with related prudent person principle implications,” it said. “With regard to the governance-related aspects, the opinion aims at summarising the issues identified, which are mainly triggered by the specific business model of captives. In this regard, the opinion identified room for further supervisory convergence regarding outsourcing and AMSB [administrative, management and supervisory body] composition,” added EIOPA. The supervisory body pointed out that the Solvency II framework is based on the overarching principle of proportionality and already includes some simplification for the calculation of the Solvency Capital Requirement of captive (re)insurance undertakings. It said that with additional proportionality measures being introduced through the review of Solvency II, this latest opinion aims to complement the regulatory framework with a focus related to cash pooling in the context of intra-group transactions and proportional but consistent application of the Prudent Person Principle in the context of investment risk management and governance-related aspects in connection with key functions and outsourcing requirements and needs related to the specific business model at stake. EIOPA stressed that it does not seek to add any new rules but rather create a level playing field for captive owners across Europe, something that Ferma and ECIROA have argued for since the start of the Solvency II process. “The opinion aims at facilitating risk-based and proportionate supervision of captive (re)insurance undertakings and further harmonise, in the context of the creation of a level playing field within the EU, good practices with reference to the topics touched upon. To this end, this opinion doesn’t introduce any new regulatory requirements, but rather complement and clarify the Solvency II provisions in light of the specific business model at stake. While further convergence of supervisory practices of captives undertakings is needed, NCAs may take into account national specificities of the captive (re)insurance sector when implementing the guidance included in this opinion,” it said. The good news for captive owners is that the insurance sector also supports the push for a more consistent application of the principle of proportionality, meaning that the corporate insurance buying community, the insurers and EIOPA are all singing from the same hymn sheet ahead of the Solvency II review. “Proportionality is vital to avoid unnecessary costs and burdens. However, it is widely acknowledged that this is not working in practice. Therefore, the Solvency II review should ensure that the proportionality principle is actually working,” said Insurance Europe in its response to the wider Solvency II review last month. For its latest consultation, EIOPA has asked stakeholders to provide their feedback by responding to the questions via the online survey by 5 January 2024.

EIOPA consults on captive supervision ahead of SII review

Latest opinion further backs more consistent application of proportionality principle

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