Solvency II and captives: a challenging marriage

Mr Montalvo reminded us that the long process of developing the Solvency II framework first began 14 years ago, and in just 14 months' time (January 2016), the whole Solvency II regime would be fully applicable. "So, 14 years of preparation, but it is now that the fun begins," he said. He compared it to marriage: "You get to know someone, you want to build a common project, you plan for everything to happen at the wedding, and then it starts, but it only works when it is done on a day to day basis. It is the same thing with Solvency II, we are only providing a framework that will allow you, on a day to day basis, to run your business." The regulatory framework was designed to be aligned with the reality of the business, he said, noting that a risk based industry required risk-based supervision. The framework, he said, was set up to address issues from the point of view of capital, of governance, of risk management and of transparency and disclosure.hideTrying to see sense He acknowledged that captives are part of the insurance world, but said they were linked to companies that may or may not have anything to do with insurance. So, he said, if a sound risk management framework makes sense for insurance companies, it should also make sense for captives. But at the same time, they should also be treated in a way that acknowledges the reality of the captive's business, he told the conference. "We are supportive of Solvency II but we are equally supportive of making sure that Solvency II does not only make sense for a traditional insurance or reinsurance business, but equally for captives." On the issue of capital requirements, he explained: "Capital is simply the fact that the money is there when you need it, nothing more, nothing less. And we are setting up a framework that wants to make sure that the capital is there when you need it." On the crucial issue of proportionality, he stressed that it is not just about size, it is about the nature of the risk and the complexity of the underlying business. Finally, Mr Montalvo acknowledged that there can sometimes be a gulf between the captive sector and regulators. "Sometimes regulators approach captives by saying 'I don't understand this business and so I am suspicious of this business'. This is the wrong approach. If you don't understand it, go and work to understand it. Equally, if your regulator does not understand the reality and nature of your business, go and explain what it is all about." Wedded to proportionality Victor Rod, as one of the regulators that is implementing Solvency II in their jurisdiction and looking to apply proportionality, was keen to stress that he was on the captives' side. "It is now crystal clear that Solvency II legislation will be applicable to captives in Europe," he told the conference. "Some of you will be concerned as to what Solvency II will mean for existing captives and for the new ones to be set up. Clearly, the new quantitative and qualitative requirements will be a challenge for each one of you, but also for us regulators and supervisors." He said the Commissariat aux Assurances had always fought, and would continue to fight, at all possible European levels, to apply the principle of proportionality included in the Directives, to all companies and especially captive companies. "We are trying to apply the new regulations with common sense, and use all the flexibilities left to local authorities to keep the implementation of the new rules as less burdensome as possible," adding that they were committed to trying to demystify Solvency II and to apply the new rules in a smart and prudent way. Captive owners will be hoping that other regulators in Europe are equally as supportive of captives and will show flexibility and common-sense in applying the new Solvency II requirements.

Solvency II and captives: a challenging marriage

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