Automatically classify captives as low risk, FERMA tells European Commission

17-01-2022

Automatically classify captives as low risk, FERMA tells European Commission

shutterstock/Andrii Yalanskyi

Captives should be automatically considered low-risk undertakings under revisions of Solvency II rules by the European Commission, says the Federation of European Risk Management Associations.

In feedback submitted on the proposed changes, FERMA welcomed the strengthening of proportionality with the creation of a the new classification of “low-risk profile undertakings”. However, there was still room for improvement by automatically classifying captives as such. 

“We call for captives to be treated automatically as low-risk profile undertakings, unless, for example, the captive poses a systemic risk or has been in breach of its solvency requirements,” it said. 

Such an amendment would reduce complexity for captives as small, less risky insurers and streamline captive regulation for national supervisory authorities The current text says that captive re/insurers covering only risks associated with the industrial or commercial group to which they belong “present a particular risk profile that should be taken into account when defining some requirements”.

Automatically classifying captives as low risk would mean national authorities did not need to assess whether they met the criteria.

Captives’ solvency rarely has any impact in the insurance market, FERMA added, but they are a valuable part of the risk management strategy of many companies.

“They provide European enterprises with an alternative form of risk transfer, which is crucial in the current hard insurance market conditions.”

The 2020 FERMA Risk Manager Survey found 27% of companies saying they would use an existing captive for hard to place risks, compared to only 1% in 2018. Its 2022 survey, starting shortly, was likely to show this trend continuing, FERMA said. 

“Captives are an essential part of a vibrant and competitive EU insurance market,” its position paper on the issue states. “The role that captives play in supporting European enterprises expanding the scope of available insurance coverages, in reducing Total Cost of Risk, in consolidating and mutualizing group’ risks, and in leveraging and increasing the negotiation power of a multinational corporation towards the traditional insurance market, could be viewed as particularly important at this juncture where insurance coverage for several large risks (eg cyber) is diminishing.”

It adds: “Furthermore, and importantly in terms of European sovereignty, FERMA is absolutely convinced that the EU has an integral role to play in terms of supporting the insurance ‘buyer’ – enterprises – by ensuring the Single Market facilitates competitively priced options for risk transfer in the EU.”

captives, risk, FERMA, insurance, reinsurance, European Commission, classification

Captive International