Addressing the issue, Vasilis Katsipis, general manager at A.M. Best, Europe, said that although “current indications are that we are likely to have some high-level convergence of opinions between the EU and the US”, the US is likely to be afforded “transitional equivalence” under the new Solvency II regime, thereby limiting the impact of European developments. This would mean that US- domiciled companies “will continue to be regulated based on the US standards and not based on Solvency II”, Katsipis said, although one would imagine that the transitional nature of such an arrangement will mean that something more permanent—and perhaps more demanding on US regulators—could become a part of the regulatory landscape moving forward. The US’s state-based approach to regulation remains a “key stumbling block” to the US achieving “full regulatory equivalence” Katsipis said, although the European regime could “accelerate the creation” of a national regulatory body in the US. But even following the creation of such a body, Katsipis said that he would nevertheless “not expect it to change the way companies are regulated in the US”.
Talking with John Rehagen, captive program manager at the Missouri Department of Insurance, he made clear that US regulators are expecting no “immediate impact in the way captives are regulated in the US as a result of Solvency II”. Rehagen agreed that “there may be some limited changes to regulation in the future to address any accreditation concerns with achieving equivalency”, but he indicated that—from his perspective at least—Solvency II will remain largely an issue for the European insurance industry, not those in the US. Karin Landry, managing partner at Spring Consulting Group, was of a similar opinion, indicating that although Solvency II would create some impetus for change in the US, it was unlikely to be immediate, except in the case of global companies with European captives, but rather have a long-term impact, and that the major driver of regulatory development has been the aftermath of the recent economic meltdown, rather than developments across the Atlantic. “In the short term, the US,” she said, “will do its own thing.” Landry did however agree with Wittbjer that “increased scrutiny of the insurance sector” was in the offing, and said that this was more as a result of the financial crisis, than any impending measures in Europe.
It’s a European thing Addressing potential changes to the regulatory environment in the
US, it is evident that some uncertainties regarding the future shape of captive regulation nevertheless remain. Whilst commentators in the US made clear that an approach that recognises the unique nature of captive entities will be a feature of the captive landscape, greater regulatory demands following the financial crisis could potentially dictate otherwise. Despite such pressures, Rehagen indicated that “captive regulation in the US will continue to evolve to meet the ever- changing needs of the industry”, with the various US state domiciles evidently keen that they approach their captive entities in a way that is appropriate to their individual needs and requirements.
Tempering this view however is the notion that despite the unique nature of captives, catch-all regulatory developments—should they materialise in Europe and generate similar moves in the US—could prove excessively punitive for the sector. As Landry and Wittbjer made clear, it is essential that appropriate differentiation remains a characteristic of both the US and international landscape. Regulators would be wrong to demand captive diversification across “20 lines,
24 US Captive . April 2011
“Regulators need to maintain an approach that recognises the
unique nature of captives regardless of pressures to strengthen regulatory oversight and control.”
with 20 different investment managers”, Landry said, addressing the potential demands of Solvency II, and instead need to maintain an approach that recognises the unique nature of captives regardless of pressures to strengthen regulatory oversight and control. Wittbjer was confident that the European regulators would recognise the unique nature of captives, but recognition might not necessarily translate into appropriate regulatory measures, and there remains an undercurrent of uncertainty as to exactly how captive entities will be handled.
Competitive disadvantage Should regulatory demands upon the captive sector in Europe
grow, it would seem that there is an opportunity for those in the US to take advantage of the new, more proscriptive environment across the Atlantic. Captives are by their nature lean, pared-down insurance vehicles, and any tightening of regulatory demands could well see captives reconsidering their captive domicile. Indicative of the potential threat posed by Solvency II to the captive industry is the number of leading domiciles that have opted out of Solvency II and equivalency. Those that have stayed away have made clear that they are taking a wait-and-see attitude to the new measures, but it would seem their stance is in part motivated by the uncertainty surrounding exactly how Solvency II will impact their captive sectors.
Guernsey, with its thriving captive sector, is one of those domiciles
that chose to opt out of Solvency II, and talking with Martin Le Pelley, chairman of the Guernsey International Insurance Association, it is evident that its decision was in a large part motivated by the
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