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Captives have had plenty of time to prepare for the new requirements under Solvency II, so is it all done and dusted, asks Udo Kappes, chairman of the European Captive Insurance and Reinsurance Owners Association.
It has been emphasised many times that the Solvency II requirements would not be a threat to captives as long as they are understood as strategic risk management tools by their parent companies. Since January 1, 2016 the Solvency II regulation is in place. What has happened since then?
Towards the end of 2015 the solvency capital requirement (SCR) and minimum capital requirement (MCR) had to be calculated and as a minimum had to fulfil the new regulation. Normally this shouldn’t be a surprise for captive owners since the implementation of the new solvency calculation method has been prepared and discussed over a period of several years.
Only in cases in which captives were affected by large losses or decided to increase their exposure significantly, did the new requirements lead to the need for capital increase, which under Solvency I would have been not necessary—or only to a much lower extent. Details about new capital rules such as the implementation and acceptance of ‘ancillary own funds’, especially about the concrete establishment of tier 1 and tier 2 capital, induced a specific process that had to be clarified with regulators.
"ECIROA is also focusing on achieving an alignment with European and international insurance risk management associations to explain to the OECD and national tax authorities the basic principles of captives."
Apart from that not all regulators requested the full preparation of all Pillar 2 documentations. This however needs to be completed by the end of 2016. We see that the main challenges in this respect are related to the question about which functions can be outsourced and where the internal functions, rules and guidelines of the parent company/group can be applied. Captive management companies in this respect need the input of the captive board and other dedicated committees.
Our recommendation related to the Solvency II documentation is that a captive shouldn’t ‘over-engineer’ the content of its documentation but rather should rely as much as possible on the parent’s existing compliance and risk management framework and just specify captive-related guidelines, related to risk appetite, etc.
What has really changed with Solvency II? We will have to see how national regulators will apply the rules. The European Captive Insurance and Reinsurance Owners Association (ECIROA) monitors this with monthly calls between interested members and permanently follows developments at the EU and national levels, explaining captive-specific issues or intervening whenever necessary.
In the coming months ECIROA is also focusing on achieving an alignment with European and international insurance risk management associations to explain to the OECD and national tax authorities the basic principles of captives. It seems that the base erosion and profit shifting (BEPS) approach of the OECD was based on a misconception of the purpose of captives.
Captives are transparent and—as far as those regulated in European countries—now fully integrated into the Solvency II regulation. Even more important to note is that the special purpose of captives allows them to operate in many cases without their own employees. Several specialised service companies are established in the captive locations which secure tax, financial and insurance compliance. As long as management decisions are taken at the captive domicile, no further questions regarding substance should arise.
Many useful guidelines or white papers have been developed, providing practical advice on how to prepare for or respond to potential threats from tax authorities or other governmental bodies.
To avoid individual threats to captives we support our members in this area. Unfortunately a first joint approach of ECIROA together with the Captive Insurance Companies Association has still not been answered by representatives of the OECD. We will not stop lobbying in this respect, but need to increase the efforts to be heard.
Udo Kappes is chairman of the European Captive Insurance and Reinsurance Owners Association. He can be contacted at: email@example.com
Solvency II, Europe, European Captive Insurance and Reinsurance Owners Association, Risk management