Expert claims captive costs could rise almost four times following Solvency II

Captive experts speaking at the Malta International Risk & Insurance Congress organised by Commercial Risk Europe last week in Valetta also said that they believe that fronting and collateral costs will certainly rise as a result of the new rules and that information on fronting costs is needed sooner rather than later. Jonathan Groves, Captive Consulting Leader at Marsh, said: “We have looked at just over 50 of our captives so far. Across the 60 or so that we have looked at the average increase in required capital is 3.7 times the existing required capital amount. So that is a pretty significant increase.” Mr Groves said that the next question is to ask how many captives actually have the newly required capital. “Based on what we have looked at, somewhere around 30% [of captives] are shy of the required capital amount based on the total capital and surplus within their company,” he said.hideFor this reason alone Mr Groves said that it is encouraging to hear recent comments from CEIOPS, Karel Van Hulle, the architect of Solvency II at the European Commission and Peter Skinner, the Member of European Parliament responsible for the project, confirming that they will listen to captive owners and it underlines how vital it is for them to grasp the opportunity. “You can see how important it is that we use our voice to project the issues that we have,” he said. Mr Groves said that the key factors that are driving the extra capital requirements from the QIS5 assessment are counter-party and catastrophe risk. On the key matter of fronting costs for captive owners, Mr Groves that Marsh has been encouraging the major fronting carriers to make specific statements about collateral and fronting costs but did not seem impressed by the response so far, especially as the deadlines loom. “Some are saying we haven’t finished working everything out...well effectively by November 30 the groups around Europe need to have submitted their own QIS5 returns, remember they had a month longer than the solo groups. They have to submit by the end of this week so next we can look forward to them telling us how they are actually going to handle collateral and fronting fees,” said Mr Groves. “Now I do say that tongue in cheek...but there is coming a point, and it really has to be quite soon, as to what view is to be taken. But that is the theoretical answer because as each of you [captive owners] know you choose an insurer because you have a relationship and they are more flexible and that turns up in price, coverage and collateral. So it is part of a relationship discussion not just a purely theoretical ‘on paper’ discussion,” continued the captive manager. Matthew Latham, Chairman of Captive Practice Group at Chartis Europe, said that the pressure on costs may lead to casualties along the way but believes healthy ongoing captives should be fine. “I don't think Solvency II is going to kill your captive in general. I think there may be some casualties along the way. I think if you have a captive in run off in an EU jurisdiction you can think whether you want to continue through past 2012. If your captive was set up for that reason maybe you are going to consider that...but by and large I expect most healthy and operational captives to continue flourishing,” said Mr Latham. “We are going to try and do our best to manage this situation with captive owners and try and minimise any additional fees that may be thrown up by the models. It is quite hard to talk about this as we haven’t finished our own internal models. We are constantly talking to our Solvency II people about what impact they think it is going to have on our business and that is going to become a lot clearer over the next month or two,” he said. “One of the other things that you might see is there is going to be an increased request for collateral. This is because if you post collateral our view is that it allows the fronting insurer to take the credit risk...So you might see the fronting insurers are going to ask for this to mitigate any fronting fee impact,” continued Mr Latham. A number of speakers and delegates suggested that Protected Cell Company structures, whereby a number of captives are able to share core capital and therefore costs, could be the answer to mitigate the impact of Solvency II on captives. Evander Borg, Chairman of the Malta Insurance Management Association and Head of Operations at Heritage Insurance Management (Malta), said that PCCs, which are legislated for in Malta, could provide a ‘lifeline’ for some captive owners pressed by the costs. “Malta is the only EU state with protected cell company legislation. We see this as the possible lifeline for captive owners who are seeking to come to terms with Solvency II and its strict capital and management requirements. The PCC structure is seen as a key selling point and a competitive advantage that we might have over competitive domiciles. It potentially offers captive owners [the chance] to share the higher capital and management costs expected from the new rules,” said Mr Borg.

Expert claims captive costs could rise almost four times following Solvency II

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