29 July 2016Bermuda analysis

Solvency II obligations prove to be “a burden” for captive directors: R&Q

Captive directors are becoming more concerned that the capital requirements of Solvency II and other regulatory obligations are becoming a much bigger distraction than when initially created, according to Paul Corver, director of Randall and Quilter's insurance investments division.

What Corver described as the 'onerous obligations' relate to risk management, production of Own Risk and Solvency Assessment Model Acts (ORSA), risk registers and very granular reporting. He claimed that this has been too much effort for most captive owners, which has resulted in more and more captive owners putting their captives into run-off.

“The burden of evidencing full understanding of the requirements under Solvency II may be a step too far,” said Corver.

“However, simply putting the captives into run-off will not alleviate the problem. The only real escape is to eliminate the liabilities in the captives either through sale, transfer, novation or commutation.

He said that captive owners are unaware of their options. “Our recent experience of providing exits to European Union (EU) captives, shows that the corporate owners generally have captives elsewhere and are just streamlining operations by removing EU domiciled companies.

“There are a number of tools available to achieve this, and we are seeing more interest from captive owners in this regard. One of the main challenges is that the captive owners are not fully aware of the options.”

He pointed out that it’s not an easy problem to solve: “Very little can be done to avoid Solvency II other than exiting the EU. There have been valiant attempts at lobbying European Insurance and Occupational Pensions Authority (EIOPA) over the years but the regime was not designed with captives in mind and there seems to have been little willingness to adapt it for captives.”

R&Q has been working alongside a number of captives to rectify the issue through acquisition, transfer or by using its Maltese consolidator.

“Where an EU captive has written direct business such as UK EL [employers liability] that cannot be moved offshore, we transfer those contracts to our Maltese company and the captive owner provides reinsurance from another captive in their group,” Corver added.

“This enables them to close the EU captive whilst retaining the historic risk elsewhere in the parent organisation.”