Politics, not Solvency II key challenge to sector

Despite uncertainties around the implications of Solvency II, captive levels remain robust, although increasing headwinds related to tax and reputation will present an increasing challenge.

That is the view of Charles Winter, COO and head of risk financing at Aon Global Risk Consulting, who spoke with Captive International about the impending Solvency II regime, threats to offshore domiciles and the state of the captive market.

How is the European captive market faring at present? With the commercial market continuing to be soft is there pressure on parents to consider the commercial market more closely?

Generally the commercial market isn’t encouraging a huge number of formations unless they are special purpose captives. That said, what we can say is that clients aren’t saying get me out either. There have been a number of reasons for this. Firstly, most went through QIS5 back in 2010 and realised they weren’t a million miles from where they needed to be in terms of capital. They have come to realise there isn’t any great need to throw capital at the issue. Secondly, continued delays around Solvency II are encouraging a wait and see approach before definite moves are made. Thirdly, a lot of the managers – and Aon included - are doing everything they can to make ongoing viability in Europe possible by keeping the barriers to entry as low as possible by sharing technology platforms and standardised our approach to the business.

David Cameron recently called offshore domiciles to heel over tax, with a meeting in London due shortly. How worried should offshore captive domiciles be about the potential erosion of their status as offshore financial centres?

It is concern, but where it is more acutely apparent is among the parents of captives who are considering the potential impact of being seen to set up operations in low tax jurisdictions. As for offshore jursidictions, tax information exchange agreements will be key to defending their positions. It is about transparency rather than actual tax rates.

MetLife recently moved one of its offshore captives onshore in response to an investigation by the New York regulator. Do you anticipate other similar moves in the coming months?

From a US perspective, there is undoubted pressure. MetLife is a big name to be moving onshore. The US regulators very firmly stated that they do not want to see premium flowing out of the US where it should reasonably sit.

Bermuda, after an initial dalliance with the idea, opted out of Solvency II for its captive sector. Are some European captive domiciles concerned that the regulatory regime will prove excessively burdensome for them?

It is clear that Solvency II and insurance regulation that isn’t captive specific is often trying to achieve things that aren’t necessarily applicable to a captive environment. With Solvency II the issue is the complexity and weight of what is required. I don’t think any would argue that a risk based system or good governance are issues for the sector, but there are concerns over the proscriptive nature of the regime and the barriers that this will create.

Europe doesn’t really have a choice to avoid Solvency II, although they can apply a simplified approach, although there are issues around simplification resulting in a higher capital charge. Europe will be seeing Solvency II for captives, but the question remains how level the playing field across Europe will be.