Solvency II has positively impacted captives despite costs, experts say

Three years on from its introduction, Solvency II has had a largely positive impact on captives, an audience of risk professionals was told during the AMRAE conference in Deauville, France. According to insurers and captive owners attending a workshop at the conference, the European directive has raised costs and red tape for the risk transfer vehicles, particularly when it comes to stricter governance requirements. On the positive side, however, the structured and more homogeneous approach imposed by Solvency II has made it easier for insurers to understand their captive clients and better adjust price and conditions to risk profiles. As a result, contrary to market fears that Solvency II might decrease the use of captives, companies are increasingly using these vehicles to transfer both traditional and non-traditional risks, the experts said. They also stressed that captives are coming in handy to reduce price volatility as the insurance market shows signs of hardening. “Regulatory expansion has given captives a new dimension,” said Marine Charbonnier, head of integrated solutions ART at AXA Corporate Solutions. “We were afraid of Solvency II and the preparation stages were very intense, and not a little stressful. Finally, however, it has been quite positive,” she added. A benefit of Solvency II is its promotion of a standard risk model for captives close to insurers’ own internal models, making it easier to evaluate credit risk. “It also enables us to offer conditions that are more refined and more adapted to their risk profile,” said Ms Charbonnier. Solvency II has forced captives to improve their governance structures. As a result, insurers can more easily find people to discuss the risks facing, and needs of, a captive. Internally, the structured approach has helped captives run smoothly when key staff need replacing, said Helen Stack-Petit, group insurance manager at electric cable group Nexans. “We have had to change three directors of our captive, and the fact that now we have all those reports that structure each key function based on our governance handbook made it much easier for the new directors to do their jobs,” she commented. The flip side is that all this structure demands resource from captive owners. “There is a cost, and it is also costly in time,” said Stephane Yvon, head of insurance at energy group EDF. “We have to spend between two and 2.5 times more time in the board, especially dealing with documents,” he added. Ms Charbonnier said that January renewals confirmed that captives are still of huge use in traditional insurance programmes, as well for hard-to-transfer, non-traditional risks. Examples of frequently transferred non-traditional risks include supply chain, intellectual property and political risks. Employee benefit programmes in Anglo-Saxon markets have also increasingly been integrated into captives after Solvency II. Ms Charbonnier sees great potential to use captives to transfer risks that can be measured by parametric tools, such as non-physical damage business interruption after climate events.

Solvency II has positively impacted captives despite costs, experts say

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