21 June 2017Analysis

Reported Solvency II ratios are 'very strong' for European captives: AM Best

The Solvency II ratios of European captives are very strong as they tend to be well-capitalised, according to an AM Best briefing on the captives taking part in its ratings process.

Among the European captives analysed, the ratio of Solvency II available capital to the Solvency Capital Requirement (SCR) ranged from approximately 160 to 240 percent.

In the AM Best briefing, "Solvency II Disclosures Demonstrate Strong Capital Positions for European Captives," the ratings agency had obtained and analysed Solvency and Financial Condition Report (SFCR) announcements from its rated European captives and has held discussions with captive managers regarding Pillar III of the Solvency II regime.

The conversations followed single entity risk carriers in Europe being required to disclose publicly an SFCR as part of the Solvency II regime on May 20, 2017.

The observations of the reported Solvency II ratios were in line with AM Best's expectations, at is suggested the captives it rates tend to be well capitalised.

Furthermore, the disclosure of own funds and the composition of SCRs show that own funds for each analysed captive is composed exclusively of unrestricted Tier 1 capital.

“AM Best has observed notable differences in the style and quality of the narrative part of the disclosures among its sampled captives, in particular in the description of governance and risk structure," said Konstantin Langowski, financial analyst at AM Best.

"Most AM Best-rated captives are able to articulate and illustrate their risk management framework and capabilities as part of the interactive rating process. However, in AM Best’s view, the disclosures fail to do justice to the risk management and governance practices of the captives, as well as to demonstrate the importance of these functions to captives and their parents.”

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