process involves four levels. At the first level, the European Parliament and Council of the European Union adopt a piece of legislation, establishing the core values of a law and building guidelines on its implementation. The law then progresses to the second level, where sector-specific committees and regulators advise on technical details, then bring it to a vote in front of member-state representatives. At the third level, national regulators work on co-ordinating new regulations with other nations. The fourth level involves compliance and enforcement of the new rules and laws.


Regarding Solvency II, the Framework Directive (level one) was voted


into force in June 2009. Our lobbying efforts at that stage were successful in that captives were recognised as specific entities requiring special treatment. A captive is defined as “an insurance undertaking owned either by a financial undertaking other than an insurance or a reinsurance undertaking or a group of insurance or reinsurance undertakings, or by a non-financial undertaking, the purpose of which is to provide insurance cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which the captive insurance undertaking is a member”. This definition was considered sufficiently broad to protect captive owners’ interests.


At level 2 (the present stage), the Commission is developing technical specifications. The Commission is assisted by the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS). CEIOPS issued numerous consultation papers in order to bring together comments. The one relative to captives (CP 79) has been strongly criticised by the Federation of European Risk Management Associations (FERMA) and the European Captive Insurance and Reinsurance Owners Association (ECIROA), the two associations representing captive owners, and the scope of captives that qualify for a simplified calculation of the SCR has since been significantly reduced. Direct captives writing compulsory third-party liability are now excluded. This means auto liability, environmental liability in certain countries and products liability for certain industries, among other excluded lines.


Five QIS Quantitative impact studies (QIS) are launched by the Commission


with the help of CEIOPS to test the impact of the formulas used in the calculation of the SCR. Four QIS have been conducted so far and the fifth one is presently under way.


If CEIOPS and the European Commission consider the results satisfactory, the formula will then be finally adopted and the directive transposed into national laws.


First analysis of studies conducted by Marsh and Aon indicate that the distribution of participation from captive domiciles is better than for the previous study, QIS4, conducted in 2009. Last year, 99 captives responded, of which 65 were based in Luxembourg. For QIS5, Luxembourg and Sweden have slightly increased their participation rate, but Ireland, Netherlands and Malta have a higher participation rate than QIS4 (up to 60 percent of active captives, excluding run-off captives). Overall in Europe, the participation rate of captives will probably be between 40 to 50 percent.


From a sample of Luxembourg and Ireland captives that responded, one can observe a slight decrease in the average solvency ratio, as


calculated with reference to QIS5, but still approximately 13 percent of captives would be considered insolvent with the new Solvency II SCR calculations, compared to 21 percent under QIS4. More than 73 percent of captives have a solvency ratio between 100 percent and 200 percent, compared to 52 percent under QIS4.


Exhibit 1: Solvency ratios achieved by captives according to QIS4 and QIS5


35% 30% 25% 20% 15% 10% 5% 0%


Solvency Ratio


QIS 5


QIS 4 Small captives have a lower solvency ratio than large ones. This is often due


to the lack of diversification in investments (especially intra-group loans). It is also explained by less risk-bearing capital in more recently formed captives.


It seems that the results from QIS5 for captives will not be too different from QIS4. The main drivers of risks remain unchanged— non-life underwriting risk and concentration risk. The catastrophic risk contribution to the solvency capital requirement has decreased, due to the inclusion of risk mitigation effects; however, concentration risk remains still too important and not appropriately calibrated.


It is, however, too early to draw conclusions from these preliminary studies, and one will have to wait until the final results are published in the second quarter of 2011 by the European Insurance and Occupational Pensions Authority (EIOPA), the new European insurance regulator, which will replace CEIOPS on January 1.


Conclusion


As indicated above, a lot of uncertainties remain regarding the treatment of captives under the new directive. Lobbying of associations such as FERMA and ECIROA along with the main European captive domiciles will be instrumental in 2011. Fortunately, the negotiation climate with the regulators is constructive. New developments on this important subject will be discussed in depth at the next FERMA risk management forum to be held in Stockholm, on October 2-5, 2011.


Pierre Sonigo is the secretary general of the Federation of European Risk Management Associations (FERMA). He can be contacted at: psonigo@gmail.com


8 emea captive 2011


< 80% < 80% - 100% < 100% - 120% < 120% - 150% < 150% - 200% < 200% - 300% > 300%


Percentage of Captives


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44