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Captive insurers stick with E.U. domiciles despite impending Solvency II rules

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Captive insurers stick with E.U. domiciles despite impending Solvency II rules

Captive insurers are making good progress in preparing for Solvency II and are defying predictions that they would leave the European Union for domiciles where the risk-based capital rules will not apply.

Solvency II, the European Union-wide risk-based capital rules for insurance and reinsurance companies that will come into force in January 2016, will be applied to captives using the “principle of proportionality” to take into account the relative size and complexity of captives.

That proportionality likely will mean that national regulators would impose lighter reporting requirements on captives than on commercial insurance companies, for example, said Gerry Connell, vice president of Marsh Management Services (Dublin) Ltd.

There appears to be a “reasonably consistent approach across all domiciles” to the way that regulators are seeking to apply Solvency II rules to captives, and the principle of proportionality, according to Adrian Richardson, head of risk finance at Aon Global Risk Consulting, a unit of Aon P.L.C., in New York.

While captives previously lagged commercial insurers in terms of preparation for Solvency II, in part because of uncertainty about how the rules likely would be applied, their relative lack of complexity means that most have a simpler task than traditional insurers in getting ready for new rules, said David O’Connor, a senior consultant at Towers Watson & Co. in Dublin.

Most captives are now making strong progress in preparing for Solvency II, experts say.

For example, many captives are well advanced in complying with the so-called Pillar II requirements of Solvency II that concern corporate governance, noted Marsh’s Mr. Connell.

There has not been a mass movement of captives away from E.U. domiciles to non-E.U. domiciles as a result of the upcoming Solvency II regime, sources said. So far, Willis has not seen any captives opt to close down or move away from an E.U. domicile because of a fear of Solvency II imposing capital requirements that are prohibitive, said Seamus Gallagher, director of consulting at Willis Group Holding P.L.C.’s global captive practice in London.

“We haven’t seen the migration out of the European Union that was originally projected,” said Vincent Barrett, managing director of captive and insurance management at Aon Global Risk Consulting in Dublin. In fact, he said, many captives based in Dublin have grown in size.

And while Solvency II may affect future captives’ choice of domicile, other factors, such as the qualifying policies that a captive will underwrite, are more likely to affect that decision, said Richard Bulmer, principal actuary at Towers Watson.

Some captives are using the diversification benefits that Solvency II offers to bring in new lines, such as employee benefits, and “optimize the Solvency II capital position,” he said.

But some captives have restructured as a result of Solvency II requirements, said Nigel Goodlad, managing director of Willis Management Ltd. in Malta. Under Solvency II, well-diversified companies will be subject to lower capital requirements than those that are monocline, he said.

Many captive owners began their discussions about Solvency II around the subject of how best to comply with the rules, Mr. Barrett said, but now those discussions have in many cases moved on to “what is the optimal efficiency point of Solvency II compliance.”

Those debates have resulted in many cases in captives increasing the lines of business they underwrite and “the optimization of the captive as a risk financing tool.”

For example, some captives have been assuming risks such as cyber or supply chain and acting in an “incubator role” between their parent company and the insurance and reinsurance markets, Mr. Barrett said.

Many captive owners are adopting a scientific approach to underwriting and using the Solvency II template to put uncorrelated risks through their captives, Aon’s Mr. Richardson said.

While Solvency II may not be the only driver for captives to diversify their underwriting, there certainly is a trend for E.U. captives to assume, for example, some of the employee benefit risks of their parent companies, Towers Watson’s Mr. O’Connor said.

Marsh’s Mr. Connell said that while he has seen no dramatic move to diversify captives’ underwriting in the wake of the European Insurance and Occupational Pensions Authority’s fifth quantitative impact study into Solvency II, some captives have restructured their programs in an effort to reduce their capital requirements. The study, published in 2011, was the first in which captives took part.

For example, Mr. Connell said, some have altered their reinsurance buying or the amount of fronting that the captive undertakes. And “we certainly haven’t seen any lines taken out of captives as a result of Solvency II.”