Ferma puts forward SII solution for captives

Ferma has presented a “concrete proposal” to European regulators for simpler, harmonised and more consistent Solvency II rules for captives as part of the regulation’s upcoming review. The federation and other captive representatives seem increasingly optimistic that such work will lead to a reduction in the burden on captives. Ferma has proposed a method to harmonise the way national supervisors evaluate proportionality measures for captives. It has been sent to the European Insurance and Occupational Pension Authority (EIOPA), which is advising the European Commission’s Solvency II review. The proposal is in response to an EIOPA consultation and is the work of a Ferma working group led by board member Laurent Nihoul. The group is composed of eight Ferma member associations – Alrim, Narim, Sirm, Amrae, Belrim, Swerma, Igrea and Anra. “Our proposed approach on proportionality is innovative in that it provides a framework for national supervisors for determining which criteria and elements should be taken into account before assessing if and how an insurance undertaking can benefit from the proportionality principle,” Typhaine Beaupérin, chief executive officer of Ferma, told CRE. “Ideally, each national supervisor will evaluate the risk profile of an insurer against the two main Solvency II objectives in a consistent manner, while maintaining flexibility in the degree of the proportionality measures. In other words, if an insurance undertaking does not pose a significant threat to one of the two Solvency II objectives – such as consumer protection and financial stability – proportionality measures should apply in an automatic and harmonised fashion throughout the EU,” she added. As part of its Solvency II review, which will in part look at the issue of proportionality for captives, the Commission has asked EIOPA to provide technical advice by June 2020. EIOPA launched its first public consultation on the review in October. It focused on reporting and disclosure, to provide advice in the form of an “opinion” next June, ahead of the Commission’s final Solvency II report due in January 2021. Solvency II introduced a risk-based approach to regulating insurers, requiring higher risk management and governance standards. Although the regulation includes the concept of proportionality – whereby the application of rules should reflect the size and business of the insurer – captive insurers are not exempt and are subject to Solvency II in much the same way as commercial insurers. Ferma has long argued for increased proportionality for captives and is lobbying EIOPA to simplify and reduce Solvency II requirements for the entities. “Ferma’s concern is primarily with the implementation of the principle of proportionality for small and less complex insurers like captives, which are used by around 30% of risk and insurance managers in Europe,” explained Ms Beaupérin. Ferma is also concerned about the inconsistent application of Solvency II by various member state regulators. “Our network of members has told us that member states are not consistent in the way they apply the proportionality principle, and they want Ferma to lobby for a more consistent approach by regulators,” said Ms Beaupérin. Ferma welcomed the “strong focus” on the proportionality principle in EIOPA’s paper that forms the basis of its initial Solvency II consultation, and acknowledged that the regulator is trying to simplify and reduce the amount of reporting and disclosure for captives. The European Captive Insurance and Reinsurance Owners’ Association (ECIROA), a long-time advocate of the proportionality principal, also wants changes from the Solvency II review. In order to present a captive industry view, ECIROA formed an informal working group on Solvency II, which included representatives from Ferma, the Captive Insurance Companies Association and the three major captive management companies. ECIROA has submitted its own response to EIOPA’s Solvency II consultation. “The perspective of ECIROA has not changed and we have proposed to adjust some of the articles, especially regarding the quarterly reporting, reduction of reports, reducing the requirements of documentation and avoiding additional workload and cost as a consequence of the reviewed future Solvency II wording,” said Günter Dröse, the association’s managing director. Both Ferma and ECIROA are confident that they will be successful in convincing EIOPA of the need to simplify Solvency II for captive insurers. “ECIROA is confident that EIOPA and the supervisors will agree to simplify and reduce some of the existing requirements based on our arguments and explanations. The common understanding of all involved parties is that the development of Solvency II is an ongoing process to improve the level of regulation, supervision and performance. Hence, this will allow additional change and adjustment also after future reviews, which the Commission will demand,” said Mr Dröse. Ms Beaupérin added: “We have already been successful in putting proportionality for small insurance entities very high on the EIOPA agenda. We will continue the dialogue and advocate for an assessment on how the principle of proportionality is currently interpreted in the various member states and for a consistent approach to its application.” While the captive industry is lobbying for increased application of proportionality under Solvency II, Ciarán Healy, director of client solutions, EMEA at Aon Captive & Insurance Managers, said “wholesale changes” are “probably not realistic”. But he said there is hope that “there will be some accommodation and acceptance that captives do not pose a systemic threat, nor the complexity of an insurer”. “We will have to see how this plays out,” added Mr Healy. Solvency II and the OECD’s base erosion and profit shifting (BEPS) initiative have weighed on Europe’s captive industry, adding to the burden of regulation and governance. According to Adrien Collovray – associate director, international, captive consulting at Willis Towers Watson – a small number of captives have closed or been sold due to the implementation of Solvency II or BEPS. “Some companies have found the application of Solvency II onerous and expensive, and this has caused some captives to close. Some owners are still concerned with SII and would like greater proportionality,” he said. Adding: “A few captives closed as a result of BEPS, but not a large number. Most companies have instead sought to demonstrate and document substance, the economic rational and risk transfer pricing – making it clear the captive is an insurance company functioning for a purpose and not tax reasons.” Mr Healy said the overall number of captives in Europe has been in decline due to M&As, the soft market, Solvency II and BEPS, but said reports on the sector’s decline have been “overblown”. “The usage of captives has not diminished and the sophistication of captives has continued to evolve,” said Mr Healy. “Solvency II has been a challenge for captives, but in some cases the issue has been overemphasised. It may have pushed out some smaller and more opportunistic captives, but those committed to the captive concept have weathered the Solvency II storm and have now come out the other side,” he continued. “Most clients have worked through BEPS and now have a better understanding of the issues and, where necessary, have strengthened their substance and particularly their decision-making processes locally. Much of the challenge of BEPS has been met, but it will not go away. I expect the BEPS conversation will re-emerge as the OECD has not finished with its agenda, but I doubt this will change the way corporates view risk transfer and captives, and it should be something that is manageable,” added Mr Healy. To view a pdf version of our Ferma Forum day 1 newspaper click here

Ferma puts forward SII solution for captives

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