Pierre Sonigo Secretary general Federation of European Risk Management Associations (FERMA)


Pierre Sonigo outlines the progress of European regulatory developments and explains why expected changes are as easy to understand as counting from one to five.


council, whose presidency changes every six months, that promulgates them, it is completely different. When the goal is to develop a new directive to regulate the insurance industry for the next 30 years with an ambition to become a world model, it is even worse. So let’s try to make it as simple as counting from one to five.


F One directive


The Solvency II Directive will formally be transposed into national laws on January 1, 2013, replacing Solvency I, which is presently in force. Is there anything wrong with it? Not really. Throughout the major financial crises of the past 30 years, the capitalisation of insurance and reinsurance companies has proven sufficient to protect policyholders. So why change? To enhance policyholder protection, to improve competition among EU insurers by creating a level playing field and to finally have a regulatory system that takes into account risk models is the official answer. Large insurance companies, I suspect, have supported this initiative from its inception in order to eliminate smaller entities, mutuals and niche players. But the final result may not be to their liking, considering the huge amount of capital that the industry will have to come up with to meet the new requirements.


Two principles


The European Constitution and the Lisbon Treaty established two fundamental principles applicable to European legislation: the principle of subsidiary and the principle of proportionality.


According to the first, there is no need to legislate at a European level


on issues of interest to a limited number of member states. Typically, captives owners could have used this principle to exclude captives altogether from the scope of Solvency II. After all, only a limited number of member states are significant captive domiciles (Luxembourg, Ireland and Malta being the largest) and local regulation is sufficient to ensure solvency and control. But captive owners and managers decided that it would be better to leave captives within the scope of the directive.


rom the outside, Europe appears a single entity with a simple legislation process. From the inside, with 27 member states, 23 different languages, 11 currencies, a commission that prepares its directives, a parliament that approves them and a


The intent of the principle of proportionality is that a “public authority


may not impose obligations on a citizen except to the extent to which they are strictly necessary in the public interest to attain the purpose of the measure”. In other words, when the obligations of Solvency II will be applied to small insurance companies (including captives), consideration should be given to their size, nature and complexity to simplify them without compromising the final objective. Good. The problem is that, at this stage, nobody really knows how to transpose this principle into concrete measures. Does this mean that capital requirements will be adapted? Could calculation formulas of solvency capital requirement (SCR) be simpler? Risk management and controls lighter? Disclosure obligations reduced? Who will decide and on what basis?


Three pillars


The Framework Directive addresses three areas of concern for which it proposes regulatory measures. These are called the three pillars. The first pillar deals with quantitative requirements, such as a calculation


of minimum capital, SCR and technical provisions. This is where most of the discussions have taken place. Captives do not compare to other re/insurers. They have their own specificities, are not exposed to the public and should therefore be treated differently. The consequences of inadequate treatment may lead to a substantial increase in required capital and the closing down of many captives.


The second pillar regulates the governance of insurance and reinsurance companies, through internal risk management, audit and control. Here also the level of controls that may be imposed on captives is disproportionate and decidedly expensive.


The third pillar will address supervisory reporting and public disclosure


in order to achieve transparency. The problem here is the confidentiality of information retained in the captive. A reserve for a major liability claim, premium volume per line of business for example, can impeach competition regulation or have an impact on the holding company’s stock market value.


Four levels


Any new directive to be implemented in Europe has to follow what is known as the Lamfalussy process. Solvency II is no exception. This


emea captive 2011


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