Captives focusing on risk management ahead of Solvency II

European captives are focusing more closely on risk management and investments ahead of the introduction of Solvency II, a new report by rating agency AM Best has revealed.

The programme, set to be launched next year, will introduce an EU-wide insurance regulatory regime, replacing the existing 14 EU insurance directives. It will be adopted by all 28 member states.

The AM Best report, titled ‘European Captives Increase Focus on Risk Management and Investments Ahead of Solvency II’, found that European captives are embracing the increased regulation of Solvency II and are using it to review their business models.

These new findings come after it was previously reported many captives viewed the new legislation as a burden, due to increased costs.

But AM Best said that its rated captives now believe the higher costs of upgrading risk management and governance will be compensated by the benefits gained from a better understanding of risk management profiles, which will provide greater value to their parent companies.

However, there are still some downsides to the legislation, according to the report. It claimed special insurers, such as captives, are not well-catered for under Solvency II’s standard formula which may not properly reflect a captive’s risks and strategies.

A captive’s board of directors will also have to gain and show knowledge and detailed understanding of the captive’s risk profile and its drivers.