Tougher Solvency II rules threaten captives cull

Representatives of Europe's insurance buying community are also worried about the possible loss of capacity for high risk lines and increased prices as a result of a Directive that is supposed to make the insurance market more competitive and secure for policyholders. The European Commission faces intense lobbying efforts from the captive and wider insurance buyer community as deadlines fast approach for Solvency II that it hopes will be implemented in October of 2012. Karel Van Hulle, Head of the Insurance and Pensions Unit in Directorate General "Internal Market and Services" told Commercial Risk Europe, however, that he thinks the buyer fears are overstated, accusations that the Commission has failed to properly consult the captive sector are unfounded and that his door is open to the lobbyists, so long as they are constructive.hide"If captive owners are saying that we don't listen then the ball is in their court. If they have a problem, let them come up with the solution. We have reached a stage where it is no longer sufficient to complain and to await the outcome of the discussions. The time has come to provide solutions and we will be more than happy to look at what is being proposed," Mr. Van Hulle told CRE in an exclusive interview. Peter Skinner, the Member of European Parliament who is responsible for guiding Solvency II through the Parliament, told CRE that his door is also open to the captive and wider insurance market interests. "There is clearly room for making sure corporate policyholders become very much more involved. There is no reason why they cannot be involved more as they need to actively make sure that their voice is heard. We will listen." This will come as welcome news to representatives of the captive and wider insurance buyer community in Europe. Günter Dröse, Chairman of the European Captive Insurance and Reinsurance Owners' Association and Global Head Corporate Insurance at DEUKONA, Deutsche Bank Group's insurance arm in Frankfurt, said: "There is a lot of dissatisfaction in the insurance market in Europe about Solvency II. Just the two or three changes already seen from CEIOPS [the committee that advises the Commission on the Directive's technical details] suggest that the extra capital required would drive 30-40% of captives out of the market as well as some commercial insurers and there is no background, except the fears stemming from the financial crisis, to explain why CEIOPS wants to toughen the calibrations so much," Mr Dröse told CRE. Real Threat "There are about 5,500 captives worldwide run by the world's biggest companies. This is a huge business and what happens if they are driven out of business? Captives have an important role in multinational companies because they insure the self-insured retentions and deductibles of their parent company. There is no alternative available from the commercial insurance market," he continued. Mr. Dröse said that ECIROA would write a letter to the E.C. and also address national Ministers of Finance to request face to face meetings and to let them know about its concerns. "We have recognised that we will need to carry out a large number of visits to meet with representatives at parliamentary and political level across the E.C. membership," he said. Peter den Dekker, President of FERMA and Corporate Insurance Risk Manager at Stork, the Dutch aerospace company, is also worried about the impact of Solvency II on captives and vows to step up lobbying efforts. "For many companies the captive may not survive and it is an important tool to manage risks and gain good access to the reinsurance market for the really high exposures. If we are not able to use captives and there is less capital available and prices go up there will be no winners," explained Mr. Den Dekker. "I think we will see a lot of premiums leave the market and the market is not too large already. There are only about 10-15 carriers that can handle large industrial risks and if you cannot use captives then the real economy will be hit. If you cannot transfer high risks some companies will withdraw from certain industries because the banks will not provide the finance without the risk transfer guarantees. The E.C. has to be really careful about what it does. It now looks as if we have to protect the policyholders' interest while I thought that should be the E.C.'s task," added the FERMA President. Due Process Mr. Van Hulle refuted accusations that the E.C. had failed to adequately listen to the captive sector. "Suggestions that we did not consult adequately on captives is a little bit unfair. It is true that the captive industry woke up very late to the impact of Solvency II. I had representatives of the captive industry in my office, after we had presented our proposal and carried out so much consultation. They were surprised to learn that they would also be covered by Solvency II as they are part of the insurance industry. I asked them to let us know what particular problems they faced and this in the end made the captive industry participate in the QIS 4 exercise," said Mr. Van Hulle. He said that the Commission also worked very closely with the domiciles that are members of the European Union, Luxembourg, Dublin and Malta, to ensure full participation in QIS 4. Many insurance buyers are also worried that Solvency II will drive significant insurance capacity out of the higher risk corporate insurance market and so drive up prices. "We will see consolidation of the insurance market. It will be a challenge because of less competition and choice because of reduced insurance capital especially for higher volatility risk exposures. And of course if capacity is limited prices will go up," said Mr. Den Dekker. Philippe Rocard, CEO of AXA Corporate Solutions, appeared to confirm this fear when he told CRE in an interview that it would need to improve its combined ratio by up to 2.5% on an average annual basis in order to meet the new capital requirements. Premium Attraction Axel Theis, CEO of rival Allianz Global Corporate & Specialty, backed this up. "If capacity does leave some higher risk lines then higher premiums will ensure that enough capital comes back. It may lead to higher rating levels but that would not be bad because it would ensure that everyone is dealing with it properly and sustainably and I do not think that this would lead to inadequate competition. But, because of greater transparency those risks with higher exposures will carry a higher cost and people without the expertise, naive capacity, the kind of companies that follow Allianz with a small percentage may not be able to do that anymore," he told CRE. Mr. Van Hulle said that he does not want to see less competition but believes that if that did occur the market would bounce back. "We do not want a system that has less competition because one of the objectives of Solvency II is to create more competition. I would be very unhappy if less competition was to be the outcome of Solvency II," he said. "But one should not underestimate the creativity of the private sector. This is one of the most exciting times for the insurance sector because of Solvency II and the crisis. There is a lot of action in the market and this will create new business. Some people may move out of more risky lines but others will move in and I am particularly confident that this [industrial risks] market will not just be a market for very large players," said Mr. Van Hulle.

Tougher Solvency II rules threaten captives cull

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