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Risk managers lobby for special captive insurance capital rules


STOCKHOLM—The full impact of Solvency II on captive insurance companies is unclear, and risk managers should continue their lobbying efforts to ensure that captives are treated appropriately under the upcoming risk-based capital rules, according to experts at the Federation of European Risk Management Assns.' recent forum.

And uncertainties still exist about the effect the rules, slated for partial implementation in 2013, will have on the cost and scope of insurance coverage that risk managers will be able to buy, experts add.

“We think, as a guesstimate, that Solvency II will put the cost base (for captives) up by about 30%,” Rory MacLeay, London-based managing director of Jardine Lloyd Thompson Group P.L.C.'s international network, told a CEO panel session.

Solvency II, which will be applied to large captives within the European Union, is prompting a “heightened interest” from chief financial officers about the strategic role captives play for their organizations, according to August Pröbstl, Munich-based head of the corporate insurance partner division of Munich Reinsurance Co. FERMA, along with the European Captive Insurance and Reinsurance Owners' Assn., has been lobbying the European Union to ensure that captives are treated in a way that is appropriate to their size and complexity, said Peter den Dekker, the outgoing president of FERMA.

Risk managers are lobbying the authorities to make clear to them that captives need a special regime, said Alessandro de Felice, group risk manager for Milan-based Prysmian S.p.A., who moderated a conference session on the topic.

In particular, he said, regulators need to be made aware that captives usually do not handle third-party risks the way traditional insurance companies do, therefore their risk to consumers is less.

While Solvency II may be delayed, and its full impact on captives is not known, it “will come sooner or later” and likely will increase the capital requirements, as well as governance and disclosure requirements, on captive owners, Markus Mende, the Basel, Switzerland-based managing director of Aon Global Risk Consulting, a unit of Aon Corp., said during the session.

He said that, in light of Solvency II, risk managers should consider whether their organization really needs a captive. And if it does, he said, then Solvency II could be very useful for the company in helping it to better understand its risks.

He quoted Walt Disney, who said: “You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you.”

Captive owners should participate in any further Europewide quantitative impact studies on Solvency II's effects and focus on preparations for the upcoming rules, he said.

“There are certainly shortcomings in the Solvency II directive” as far as captives are concerned, and each country likely will adopt the rules slightly differently, said Urs Neukom, director of corporate strategic solutions at Zurich-based Swiss Reinsurance Co. Ltd.

There are still “gray areas” about how the rules would apply to captives, and it is not clear when the legislation will come into force, he said.

But, he said, risk management is the focus of the new rules, and captive owners should take this into account and embrace it.

Meanwhile, debate exists about the extent to which Solvency II will affect insurers and their clients.

“I like Solvency II. It simplifies the way we structure our legal entities, which will provide benefits from our own diversified book of business,” said Peter Hancock, New York-based CEO of Chartis Inc., in an interview. “Solvency II will provide scale economies with a single hub with one regulator in the E.U. There's been a lot of attention from authorities to modernize regulation, and we feel good about the modernization of regulation globally,” he said.

When added to the other pressures that the insurance industry is facing, such as low interest rates and other macroeconomic factors, it is likely that Solvency II will result in some consolidation of insurance carriers, according to Greg Case, Chicago-based CEO of Aon Corp.

But while certain types of business will face larger capital penalties under the new regime, the fact that most large insurers will have internal capital models and will have had similar ways of loading capital for certain business lines, means that it is unlikely there will be wholesale shifts by insurers out of certain lines of business, said London-based Lex Baugh, CEO of Chartis' European operations.