NU Online News Service, Jan. 18, 3:25 p.m. EST
Corporations that have captive-insurance companies domiciled in Europe need to be aware of the implications of Solvency II proposals, which could significantly increase the capital and compliance burden of European captives, according to a report by Fitch Ratings.
The report, “EU Captive Market At Risk From Solvency II—Credit Ratings could Become Critical for Captives Domiciled Offshore,” finds that owners that retain captives in the EU will have to strengthen risk management and governance functions, and in some cases may require additional capital injections.
As Solvency II is designed for an “average” insurer, Fitch says, it poses challenges for captives, due to their unique characteristics compared to other insurance entities. The agency expects Solvency II to have varied implications for the EU captive industry.
The global-captive market is substantial, with more than 5,600 registered entities writing annual premiums of about $125 billion. Bermuda, the Cayman Islands and Vermont are home to over 2,000 captives and write the majority of global premiums—about $100 billion—according to the report.
The largest captive centers in the EU are Luxembourg and Ireland, which write about 10 percent of global business by premiums.
As an alternative to the EU, Fitch says, captives could be re-domiciled to non-Solvency II jurisdictions and write EU-based business through a fronting entity. In this case, Fitch says, obtaining a credit rating on the captive could lower the overall capital cost.
Bjorn Norrman, associate director with Fitch Ratings in London, tells NU Online News Service that captive domiciles are chosen partly for their tax structures and owners would need to weigh the advantages of keeping the captive onshore or re-domiciling.
He notes that an alternative for those captives now domiciled in Ireland or Luxembourg is Guernsey.
Sonja Zinner, director at Fitch, notes that organizations in the U.S.that have EU captives may decide to re-domicile in any of the U.S.domiciles or Bermuda.
She adds that, according to the most recent impact study, 30 percent of captives would fall short of capital requirements, compared to 15 percent of all other insurers taking part in the study.
This is because Solvency II it is geared to regular reinsurers and insurers—which tend to write more diverse lines of business than do captives, which often tend to be monoline writers, she says.
Owners of those captives that remain domiciled in the EU, Fitch says, will need to strengthen risk management and governance structures. This would be positive in that it will help captive owners better understand their risk exposure and allow for more informed decision making.
Zinner adds that while stringent, additional risk management requirements would ultimately benefit the captive.
“If you improve risk management and risk awareness, the captive becomes more resilient, which is beneficial,” she says.