Ferma increasingly hopeful SII reforms will change landscape for captives

Ferma has told Commercial Risk that it is increasingly hopeful that the ongoing review of Solvency II will usher in more proportionate treatment for captives after the European Parliament published a key report stating its likely position last week. The federation of European risk managers believes that the positive reforms could be finalised before the end of this year.

The association said the report by the European Parliament’s economic affairs (ECON) committee on proposed changes to European capital adequacy and reporting rules under Solvency II “is a good sign” and backs further proportionality.

“Ferma was encouraged by the European Commission’s original proposal, and even more so now by the discussions in the European Parliament’s ECON Committee where the rapporteur, MEP Markus Ferber, really embodied the spirit of greater proportionality and a more risk-based process in his proposed changes to the text,” the federation told Commercial Risk.

“Ferma is hopeful that its efforts in pushing the  proportionality agenda will see it make it all the way through the process,” it added. But the federation stressed that “we are not there yet”.

“We have seen encouraging signs from the process in the Parliament, but that will now go to a plenary vote most probably in September, and then into trilogues between the European Commission, Parliament and the Member States. The Member States may still push for changes around proportionality but there are other more contentious issues, such as capital for insurers,” said Ferma.

The association explained that the positions taken by the European Parliament’s ECON committee could get voted during down during plenary but thinks this is unlikely.

If the proposed reforms of Solvency II get through the Parliamentary vote they will then move to final political discussions between European Commission, Parliament and EU Member States, known as trilogues.

“Hopefully, it could all then be signed off under the rotation of the Spanish Presidency of the Council of the EU, ie by the end-December. But there are a number of factors that could impact this, including the Spanish general election,” said Ferma.

It believes that the current proposals moving through Parliament should “change the landscape for captives in the EU because the proposed reforms to Solvency II would lead, in principle, to a more streamlined, proportionate and risk-based prudential process for captive entities”.

Rapporteur Ferber told Reuters last week as the ECON report was published that “we are moving from one-size-fits-all solutions to more risk-based supervision,” which sounds very promising for captives.

Europe’s risk and insurance managers have become increasingly frustrated since Solvency II was introduced in 2016. They complain that national supervisors have not consistently applied the principle of proportionality to captives.

Risk managers taking part in Commercial Risk’s annual European Risk Frontiers survey have consistently said that the complexity and cost involved in running a captive remains a deterrent.

If the new Solvency II package forces national supervisors to properly apply proportionality to captives, it would be a significant win for the risk management community during a still-tough insurance market when captives are high on the agenda.

Ferma has been pushing for a more proportionate and risk-based prudential insurance capital regime in the EU for several years.

It has stressed there should be some in-built sensitivity to the prudential regime to reflect the specific business model and risk profile of captives.

The federation explained that it previously called on the EU Institutions to automatically recognise captives as “low risk-profile undertakings in the context of Article 29”.  It added that the EC accepted this argument.

“This article, per the Commission’s proposed revision to Solvency II, formulates criteria for determining low-risk profile undertakings (LRPUs). These LRPUs would be able to implement a more risk-based and proportionate compliance with the prudential regulation, eg less frequent reporting requirements,” said Ferma.

And it seems like the European Parliament is now very likely to agree to the same reforms.

Ferber is confident that the proposals in the ECON report would delivered a good result for the insurance sector and the risk and insurance management community.

“Solvency II is the world’s gold standard for insurance regulation, but so far its calibration has been overly conservative… as a result, European insurance companies are forced to hold hundreds of billions in excess capital,” he reportedly told Reuters.

But while Ferma and Ferber thinks that the ECON committee has delivered on Solvency II, the European insurance industry seems less keen on the wider changes.

Its representative body, Insurance Europe, said in a statement last week: “Europe’s insurance industry has expressed some disappointment at the position adopted by the European Parliament’s Committee of Economic and Monetary Affairs on the Solvency II review today.”

Olav Jones, deputy director general from Insurance Europe, said: “It is overall an improvement on the initial European Commission proposal and Council of the EU text in areas such as capital, volatility and proportionality. However, it is disappointing that some of the original ambitious proposals have been watered down.”

Jones said this is a “missed opportunity” to allow the insurance industry to deliver more for consumers and invest even more in Europe.

“Private investment is vital for Europe to meet its green and digital transformation goals. The trilogues between the three main EU institutions can now begin. A key objective of the review is for insurers to invest more in long-term capital for the economy. The European Commission has also recently committed to simplifying and reducing reporting obligations by 25%. We call for these ambitions to be reflected in the trilogue negotiations and the final text,” he added.