NU Online News Service, Jan. 18, 3:25 p.m.EST

Corporations that have captive-insurance companies domiciled inEurope need to be aware of the implications of Solvency IIproposals, which could significantly increase the capital andcompliance burden of European captives, according to a report byFitch Ratings.

The report, “EU Captive Market At Risk From Solvency II—CreditRatings could Become Critical for Captives Domiciled Offshore,”finds that owners that retain captives in the EU will have tostrengthen risk management and governance functions, and in somecases may require additional capital injections.

As Solvency II is designed for an “average” insurer, Fitch says,it poses challenges for captives, due to their uniquecharacteristics compared to other insurance entities. The agencyexpects Solvency II to have varied implications for the EU captiveindustry.

The global-captive market is substantial, with more than 5,600registered entities writing annual premiums of about $125 billion.Bermuda, the Cayman Islands and Vermont are home to over 2,000captives and write the majority of global premiums—about $100billion—according to the report.

The largest captive centers in the EU are Luxembourg andIreland, which write about 10 percent of global business bypremiums.

As an alternative to the EU, Fitch says, captives could bere-domiciled to non-Solvency II jurisdictions and write EU-basedbusiness through a fronting entity. In this case, Fitch says,obtaining a credit rating on the captive could lower the overallcapital cost.

Bjorn Norrman, associate director with Fitch Ratings in London,tells NU Online News Service that captive domiciles are chosenpartly for their tax structures and owners would need to weigh theadvantages of keeping the captive onshore or re-domiciling.

He notes that an alternative for those captives now domiciled inIreland or Luxembourg is Guernsey.

Sonja Zinner, director at Fitch, notes that organizations in theU.S.that have EU captives may decide to re-domicile in any of theU.S.domiciles or Bermuda.

She adds that, according to the most recent impact study, 30percent of captives would fall short of capital requirements,compared to 15 percent of all other insurers taking part in thestudy.

This is because Solvency II it is geared to regular reinsurersand insurers—which tend to write more diverse lines of businessthan do captives, which often tend to be monoline writers, shesays.

Owners of those captives that remain domiciled in the EU, Fitchsays, will need to strengthen risk management and governancestructures. This would be positive in that it will help captiveowners better understand their risk exposure and allow for moreinformed decision making.

Zinner adds that while stringent, additional risk managementrequirements would ultimately benefit the captive.

“If you improve risk management and risk awareness, the captivebecomes more resilient, which is beneficial,” she says.