10 June 2022ArticleAnalysis

Regime change and anticipation

If one word could be applied to the captive insurance market across Europe, that word would be: ‘anticipation’.Regulators are being keenly watched to see what they decide in terms of changes to a number of areas of the market.Proposed changes to the Solvency II regime in the EU remain at the centre of the current list of regulatory issues and challenges to the European captive insurance market in 2022.According to Chubb, when Solvency II was first introduced it significantly impacted capital and solvency requirements for the European captive market, as well as governance arrangements for captives. While these prudential capital requirements are now more settled, in many European jurisdictions governance requirements and responsibilities of management continue to be under the spotlight.Other European regulations continue to evolve, with the implementation of the Insurance Distribution Directive changing and strengthening requirements relating to product terms and distribution.The European Commission (EC) is now weighing up possible changes to the Solvency II regime, as it absorbs the lessons learned from less than a decade of that regime’s existence in its current form.The Federation of European Risk Management Associations (FERMA) has been firmly lobbying the EC to change the Solvency II regime in the EU. Issues around proportionality have been raised but as FERMA president Dirk Wegener explained in May 2022 when, this is an ongoing issue for the group, with no firm news as yet. It remains to be seen just what the EC will announce in terms of concrete proposals, as opposed to proposed changes that have been the topic of much discussion.FERMA is pressing for captives to be automatically considered low-risk undertakings under revisions of Solvency II rules by the EC.In feedback submitted on some of the proposed changes, FERMA welcomed the strengthening of proportionality with the creation of a new classification of “low-risk profile undertakings”. However, there was still room for improvement by automatically classifying captives as such.In AM Best’s

November 2021 Market Segment


on the state of the European captives market, the rating agency concluded that many captives would not benefit automatically from proposed “proportionality measures” when it comes to Solvency II reform, but may still apply them after approval from national regulators. Clarification will also bring benefits, it notes.“The lack of consistency in regulatory approaches between EU national supervisors is a common complaint from captives and other insurers,” said the report. “The more precise rules of the proposal compared to the principle-based approach reflected in the current legislation will likely go some way to address this issue.”All European countries where captives are domiciled will be watching events closely, as will the rest of the insurance industry (especially those with Solvency II equivalence)—and it would not be a stretch to say that once the EC publishes firm proposals for Solvency II changes, these will be meticulously pored over by a wide range of people in the industry before further lobbying breaks out, the intensity of which will depend on whether the changes go far enough, or too far.Veterans of the industry will doubtless recall how long it took to come up with the original Solvency II regime, given the myriad issues that had to be agreed upon. Some will hope for an easier road for any reforms to it.

“The lack of consistency in regulatory approaches between EU national supervisors is a common complaint from captives.”

AM Best

Dreams of domiciles
There have been a number of pushes by individual countries to start a discussion on attracting captive insurance companies. In 2021 there was a call by the French insurance risk management association AMRAE to encourage the French government to look into this area, with AMRAE claiming that dozens of French companies would be willing to create their own captive in order to solve perceived insurance issues.AMRAE subsequently announced it was setting up the French Federation of Company Captives to “bring the interests of these companies into the public debate and support projects for the creation and deployment of captives in France”, the association said.“Faced with the emergence of multiple exceptional and systemic risks, in a context where the insurance market no longer meets the needs of companies, whatever their size, AMRAE reaffirms the major interest of captives to re/insurers in the organisation of the resilience of companies and, consequently, of the French economic fabric,” it explained in a statement.AMRAE said that 50 French companies have plans to create captives, several of which it says have recently requested approval from European regulators to domiciliate them outside France. In 2021 France’s Ministry of Economy was reportedly ready to introduce a new tax and regulatory framework in the 2022 annual Financial Act to facilitate mid-cap and large firms creating or relocating captives in France.However, AMRAE said it deeply regretted the absence of the provisions in the bill “and the scheduling considerations which seem to be the cause”.Despite this, the association welcomed “the quality of the dialogue” with the public authorities and progress made on the issue. It remains to be seen what will emerge in terms of concrete progress.Other areas of Europe have been captive-friendly for some time, with Malta being one of the most active recent areas of activity thanks to its government specifically targeting this area of business and attempting to encourage companies to create captives or protected cell companies on the island after tweaking their insurance rules and regulations.Similar captive-friendly environments exist in Luxembourg, Ireland, Sweden, and Switzerland, but it’s worth pointing out that the number of captives in Europe is still dwarfed by the number in the US, where states such as Vermont have been pitching for captive business for decades, tweaking its state insurance rules to create a welcoming environment for captive insurers to be set up and remain.Post-Brexit concerns
In the UK captive insurance regulations are being pored over since its departure from the EU.In the past the UK has not been seen as being welcoming to captives, although the Crown Dependencies—the Isle of Man, Guernsey and Jersey, which are island territories in the British Isles but not part of the UK—have different attitudes to captive insurers and have created their own captive markets.Since Brexit there have been calls by many groups and organisations for the UK Treasury to make its own changes to the UK’s Solvency II framework, with anything from minor tweaks to substantial changes suggested.Creating a separate regulatory regime for captives outside a revised Solvency II could allow the UK to develop as a captive domicile, the Association of Insurance and Risk Managers in Industry and Commerce (Airmic) has stated.These comments came in the context of the government’s inquiry into its planned post-Brexit revision of Solvency II. Airmic submitted evidence in March 2022 to the inquiry by the House of Lords Industry and Regulators Committee looking at the future regulation of the UK’s commercial insurance and reinsurance market.Airmic expressed its support for a new regulatory regime for captives in the UK but argued that “such an environment would be appealing only if it exists outside of Solvency II”. It cited the example of the successful bifurcated regulatory regime in Bermuda, the largest captive domicile in the world. Bermuda’s commercial insurance regulation has Solvency II equivalence, while its captive classes of insurer (classes 1, 2 and 3) remain governed by a separate risk-based framework.It is not known what the UK government is planning in terms of concrete changes to the UK’s Solvency II regime and, like FERMA, organisations such as the London Market Group have been lobbying firmly for the government to take the views of the insurance industry into account.It will remain to be seen what kind of proposals come out of the Treasury, although it is worth pointing out that this area of reform might not be seen as a priority given the cost of living crisis that has caused so many of the Treasury’s plans to be re-written.European regulators are also facing other issues, in common with the rest of the world. Cyber attacks have seen a marked spike upwards, from the aftermath of the COVID-19 pandemic and from targeted attacks by terrorist groups and nation states.The ongoing Russian invasion of Ukraine is a complicating factor in all of this, with the final outcome still uncertain. What is also unclear is the impact the war will have on the European insurance market. Could captives be impacted? A definitive answer on this might not be obvious.In the meantime European captive owners will watch the regulators and wait for firm news.