AM BEST
How do you see the captive regulatory environment developing, particularly following Solvency II? Steve Chirico: Proportionality is the way to go when we are talking about captives. Solvency II is a good structural environment for large insurers and reinsurers, but when you get to the smaller entities, regulation for regulation’s sake simply doesn’t make sense. What proportionality allows is for the regulatory framework to be appropriately scaled to the size of the company. This helps to diminish any unnecessary regulatory burden from a cost and time perspective and will help to reduce frictional and people-time costs inherent in complying with the regime.
What about the confl ict between higher standards and less burdensome regulation? Chirico: There will defi nitely be a fi ght over the issue. Large commercial insurers and reinsurers are lobbying for everyone to be considered under the same rules. Niche companies and captives are, meanwhile, arguing that proportionality should be applied. At AM Best our stance is that one size does not fi t all when approaching issues such as enterprise risk management (ERM) and capital allocation. ERM documentation expectations for a large insurer simply cannot be applied to a very small, niche company. From what we see, the regulatory fi ght should play out and result in some form of regulatory proportionality. All of the tenets of level 1 and some of those from levels 2 and 3 will be applied across the industry, depending upon the size, complexity and risks taken on by the entity. Solvency regulation should be applied where it makes sense and where it creates a robust regulatory environment for those fi rms it is applied to.
Where do you see areas of growth in terms of line, and what factors are driving these moves? Chirico: Most recently the lines that we have seen added to captives— and in no particular order—are medical stop loss, employee benefi ts, terrorism risk protection and surety bonds. What appears to be happening is that captives are trying to maximise their value—whether they are a single-parent captive trying to maximise value to the parent company, or a group captive aiming to increase value to its policyholder group.
What we see is that as fi rms aim to cut costs and become more effi cient, companies are asking how they can use their alternative risk solutions to improve their overall risk footprint. A lot of low volatility business is being considered by captive owners to reduce the amount of money that is leaking out of the corporation when they buy working layer insurance and are dollar-trading with large commercial insurers. Everybody knows that doesn’t make any sense and, where you can, you add these low volatility lines of business to your captive so you can risk manage and claims mitigate your way to a lower combined ratio, which will then be refl ected in the bottom line.
CICA | Forty years of captive leadership 51
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