Solvency II could create opportunities for new captive owners–France

But leading French risk managers interviewed by CRE for this year’s French leg of the annual Risk Frontiers survey have become increasingly confident that the monster is unlikely to be as ugly as initially feared. Not only that, but the imminent arrival of the directive could even create opportunities for firms that are eager to fully understand the rules. “Solvency II could generate good opportunities to buy an existing captive, one that is already mature,” said François Malan, a member of AMRAE’s board.hide“Some companies are selling their captives to bring money back to France, so buying one could prove to be a better deal than setting up a new one from scratch,” he said. That is one of the options being weighed by Mr Malan’s company, Nexity, which does not own a captive yet. With the situation still evolving, he is studying the subject closely to identify the best alternatives. “Some companies are looking at options to have a captive in Luxembourg, which looks for me the best jurisdiction today,” he said. “But this is something that can change. Maybe one year from now the best jurisdiction will be Dublin or somewhere else. When you study the subject, the impact to Solvency II on the captive strategy emerges as a major point. And the answer is that it may be necessary to put more money in the captive than was the case previously.” Yvon Colleu, AMRAE’s treasurer, noted that plenty of uncertainty remains about the future of captives, but Solvency II is not likely to completely blow up the strategies of large companies for now at least. “Solvency II will mostly impact the cost structure of captives, as they have to formalise its risk management procedures. But as a principle this is a good idea,” he said. “Then there is the principle of proportionality that the directive proposes, and as of today we do not have all the elements to evaluate which will be the level of exigence [an imperfection marked by urgency] from the regulators. We have to wait to be sure about the extra management costs for captives, but it is likely that small captives will be more affected than the large ones,” Mr Colleu added. “Solvency II is not going to change our captive strategy,” stated AMRAE’s president Gilbert Canameras. “As far as I can see, reinsurance captives kept by industrial groups are not going to be affected. Perhaps there will be restrictions to what we call provisions for the fluctuation of loss ratios, but in our particular case I do not believe this will be a problem,” he remarked. Mr Canameras also has little fear that Solvency II will affect the availability of insurance coverage in the market, although he believes that the directive will affect the costs of insurance companies. In his view, pressures on prices and conditions are more likely to come, if they come at all, from the spate of natural catastrophes that have hit the market in recent times. “In general terms, I do not think there will be problems of capacity in the insurance market,” Mr Canameras said. “I believe the market is going to harden because of the natural catastrophes of last year and also because the occurrence of similar events in the future has not been discarded. Other natural catastrophes are going to take place, causing ever more losses, and insurers will try to limit guarantees. Not because of a lack of capacity, but because they will want to rebuild their reserves, either by increasing excesses or by reducing limits,” he pointed out. Mr Colleu noted that insurers have reduced the limits for some types of coverage after the recent series of natural catastrophes. “But it was probably not in a worrying proportion, and it depends on the regions where the company operates,” he said. “In some products like the 10-year construction guarantee that is specific to France, the market is possibly reaching its limits. But we have not seen a hardening of the insurance market in general,” continued Mr Colleu. The AMRAE treasurer is not concerned about capacity constraints in the market either, and also said that if any hardening comes about, it will mostly come because of the performance of insurance companies, which is currently not too much a reason for concern. “The results of insurance companies have been mostly good in the first [and second] quarter, and we generally see a hardening of the market only after a run of very poor or even catastrophic results.” Mr Malan, for his part, has identified a trend among insurers to be more selective about the risks they take on. “I am confident in the capacity of big insurers, but there is going to be a difference between a good and a bad risk,” he said. “If a company is based in an area exposed to quakes, like Japan, it will have to pay higher premiums for its coverage, and the risk manager will understand that, because it is normal.” But no general capacity issues should arise in the near future, he said. “I do not fear that major insurers will face a lack of capacity, and I believe they are ready to comply with Solvency II,” he said. “For the last two or three years insurers and brokers have been warning about the arrival of a hard market, but it has not been the case. In any case, if there are pressures for a hard market, it will be because of insurers’ technical results.” Mr Malan also warned that risk managers should keep a close eye on those results, as they are unlikely to be let off the hook if their bosses are surprised by the insolvency of one of their insurers. “Risk managers have an important role to play in making sure that their insurers are in a healthy financial position,” he said. “AIG was an alert for us, and so were the recent problems of Groupama. We will be more protected with Solvency II, but we need to conduct financial surveillance of our main insurance partners.” Mr Malan added: “I think risk managers will be in trouble in the case of the bankruptcy of insurance firms that work with their companies, and they will need to explain to their boards what they have done to manage this risk.”

Solvency II could create opportunities for new captive owners–France

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