Ferma pushes for further progress on captives in Solvency II review

Ferma has welcomed proposed changes to Solvency II that would strengthen the concept of proportionality, and in particular the creation of a new classification of “low risk-profile undertakings” that would clearly help captives gain lighter treatment under the capital adequacy and reporting regime. But the federation called for a further revision that would enable captives to be treated as low-risk undertakings automatically unless there are clear reasons to apply the full criteria. Interest in captives has spiked in Europe since the arrival of the market hardening and further insurability challenges brought by the Covid-19 pandemic. Ferma has argued that it is in everyone’s interest for Europe’s businesses to more effectively manage and transfer their risk, and that the cost-effective use of captives is a key tool for risk and insurance managers. The latest proposals for updating Solvency II finally explicitly recognise that captives need to be treated differently. But Ferma said they need to go further in the current market. “Ferma has consistently advocated risk-proportionate regulation of captives in European insurance regulation. It now gives a qualified welcome to proposed changes to Solvency II that would strengthen the concept of proportionality, and in particular the creation of a new classification of ‘low risk-profile undertakings’,” stated the federation. “We call for captives to be treated automatically as low risk-profile undertakings unless, for example, the captive poses a systemic risk or has been in breach of its solvency requirements,” it added. Ferma said this amendment would further reduce complexity for small and less risky insurers, specifically captives. This is one of the five main problems that the European Commission addresses in its current review of the Solvency II rules. It would also streamline captive regulation for national supervisory authorities, added Ferma. “Ferma reiterates to the Commission that the solvency of a captive rarely has any impact in the insurance market, but that they are a valuable part of the risk management strategy of many companies. They provide European enterprises with an alternative form of risk transfer, which is crucial in the current hard insurance market conditions,” stated the federation. In its comments to the Commission, Ferma stressed that European risk managers began turning more to captives as a source of (re)insurance capacity and risk management information in the face of a hardening insurance market at least two years ago. This is backed up by its 2020 Ferma Risk Manager Survey, in which 27% said they would use an existing captive for hard-to-place risks, compared to only 1% in 2018. The survey also found that some 16% of respondents were considering the creation of a new captive. “The 2022 Ferma Risk Manager Survey, starting shortly, is likely to show that this trend has continued and possibly accelerated, with concern among risk managers not just about prices but about availability of capacity for certain exposures such as cyber risks,” stated Ferma. The federation was keen to stress that it was happy to see progress made on proportionality in the current proposals on Solvency II. But it called for more. “We are of the firm belief that more should be done to make Solvency II truly risk-based and proportionate. We say this as insurance buyers but also as users of captives during hard market conditions, and also amid growing questions over the ‘insurability’ of certain risks, such as those linked to climate change. Options for risk transfer are, therefore, more important than ever. Ferma looks forward to contributing our unique expertise to the political discussions on Solvency II,” concluded the federation.

Ferma pushes for further progress on captives in Solvency II review

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