Ferma and ECIROA flesh out proposals to boost proportionality for captives under SII

The European Insurance and Occupational Pensions Authority (EIOPA) must use this year’s Solvency II review to recognise that national supervisors have so far failed to apply the principle of proportionality (PoP) to captives and force the issue by issuing clear guidelines, according to risk management federation Ferma and ECIROA, the captive owners body.

Ferma’s approach provides a framework for national supervisors to use in determining which criteria and elements should be taken into account before assessing if and how an insurance undertaking can benefit from the proportionality principle.

Both bodies made clear and rational proposals to EIOPA about how the PoP could be applied in a much more harmonised and legally sound manner across the European Union.

By doing so, they have effectively allied with leading European insurer bodies such as Insurance Europe and the Association of Mutual Insurance Companies in Europe (AMICE), which have also called for a more consistent use of proportionality under Solvency II. The insurance bodies are concerned that smaller and specialty insurers are being burdened by unnecessary capital and reporting rules designed for bigger insurance groups that pose a potential systemic threat.

“Ideally, each national regulator will evaluate the risk profile of an insurer against the two main Solvency II objectives – consumer protection and financial stability – in a consistent manner, while maintaining flexibility in the degree of the proportionality measures,” Ferma explained to Commercial Risk Europe.

“In other words, if an insurance business does not pose a significant threat to one of the two Solvency II objectives [consumer protection and financial stability], then proportionality measures should apply in a harmonised fashion throughout the EU,” continued the Brussels-based federation of European risk and insurance management associations.

Ferma has put forward a “rational and more predictable” methodology for the application of proportionality measures that would enable a shift away from “local sensitivity” to increased legal certainty.

The federation explained that its suggested approach would not require any legal change to Solvency II. The supervisor’s flexibility in the final choice of proportionality measures would be maintained. But importantly, the supervisors would use the same holistic, risk-based framework common across the EU.

“Feedback from Ferma’s network of members indicated that member states are not consistent in the way they apply the proportionality principle. Ferma’s focus in the Solvency II review, therefore, is primarily to get improvements to the application of proportionality for small and less complex insurers like captives, which are used by about 30% of risk and insurance managers in Europe according to Ferma’s 2018 European Risk Manager Survey,” explained the federation.

ECIROA has also proposed a more consistent and clear methodology for the application of proportionality that it says would represent a “win-win” for both captives and supervisors, based on its cost-benefit analysis. It said that EIOPA should advise the European Commission, when it presents it Solvency II reform proposals in June, that the PoP should be automatically applied to captives based on the number of insurance contracts they write.

“It is proposed to introduce the number of contracts that are written by a reinsurance undertaking as a threshold for the application of SII. Reinsurance companies that write up to 20 reinsurance contracts should be exempted from SII due to the following reasons: they are not of systemic relevance and consumer protection is not in scope as they are doing B2B business only; the risks that are being reinsured pertain to the parent company of the reinsurer or its subsidiaries; in addition, these companies do not have a complex risk profile,” ECIROA told EIOPA in its response to a consultation that closed recently.

“We come to the conclusion that captives are by their very nature, in comparison to the market (re)insurers, so structured that the application of the Principle of Proportionality allows captives to be defined as a separate category of insurers, which have to be supervised by local authorities but not necessarily under the same requirements as the market (re)insurers. The three targets of Solvency II will not be offended as neither consumer protection, increased market transparency or financial stability are threatened by the performance of captives. This is clearly expressed in the IAIS Application Paper on the Regulation and Supervision of Captives (November 2015),” continued the ECIROA presentation.