Solvency II implementation will be strategic for captives

Recent claims by some in the industry that the costs of Solvency II compliance could be passed to captives will not necessarily be true, according to European insurance experts. It has been suggested that European insurers could pass the costs to offshore captives, something that would have many implications for the market.

But Dirk Schäfer, an industry risk analyst and Munich Re’s Corporate Insurance Partner, says mitigating the impact of Solvency II will be far more strategic than that. He pointed out that Solvency II regulations are far from finalised, particularly where captives are concerned, and says that while predictions of rising fronting costs and an exodus of onshore captives to offshore locations are possible, it is premature to speculate.

“When we talk to owners of EU-based captives, we do not get the impression that many of them will move their captives offshore,” Schäfer told Captive International. “What is often discussed – if a company has an EU and an offshore captive – is the strategy of using the EU captive for EU business and the offshore captive for non-EU business.”

Schäfer also pointed out that while rising administrative costs may increase the cost of doing business which, for offshore captives, can include fronting costs, accurately determining risk should be the first priority with or without Solvency II.

“We are convinced that the credit risk of entities located in offshore domiciles will have to be recognised adequately by fronting companies. The recognition of the specific credit risk of an offshore entity will only result in higher fronting costs if the credit risk has not been considered sufficiently before; generally, this should not be the case,” he said.