4 September 2013Analysis

Solvency II’s second pillar an increasing concern for captives

With captives writing increasing levels of employee benefits, closer attention will need to be paid to Solvency II’s second pillar—concerning corporate governance—says Towers Watson.

Until recently the issue of most concern related to capital requirements, says Mark Cook, director at Towers Watson, with captives obliged to balance “risk retention, capital and reinsurance” as they seek to comply with the forthcoming regime.

However, as Solvency II nears, captives are increasingly realising that they need to pay attention to second pillar requirements around improved corporate governance and control, says Cook.  This is particularly telling for those captives writing employee benefits—a line that has not traditionally found a home in the captive market, but which is “changing fast”—with captives having to bring in “specialist benefits expertise and advice” in order to prepare for Solvency II. He said employee benefits programmes tend to have a very different risk profile to traditional property and casualty business, and as such captives will need to respond to Solvency II requirements more carefully.

Despite the additional oversight needed to write employee benefits, Cook said that the line represents an attractive addition to a captives portfolio, representing an “essentially uncorrelated line of business” to more traditional property and casualty lines.

Cook added that while governance requirements would increase as a result of the regime, it was unlikely that it would prompt captives to redomicile.  As he explained, with regulators hoping to avoid “regulatory shopping”, there has been greater focus on regulatory uniformity internationally. As such, Solvency II requirements may yet be reflected in other domiciles, with no move to light touch regulatory jurisdictions likely among captives.