Jonathan Groves, Chartis I


nsurance and reinsurance companies are operating in an increasingly complex regulatory environment. Similarly, purchasers of insurance are finding themselves in the position of responding to increasingly complex regulations. Regulatory change is being


proposed, consulted on, passed into legislation or implemented on an ever more frequent basis. In this article, we will provide some additional insight into the effect of this changing regulation on captive reinsurers.


Regulation of insurers The pace of regulation is increasing in both more and less mature


insurance markets. In Europe, the upcoming implementation of Solvency II represents


the most significant change to insurance regulation in 25 years. It signifies a fundamental change to the operation, administration and regulation of insurers. Solvency II covers both professional and captive insurers. With captives being generally less diverse and maintaining a smaller capital base, the additional capital, extra governance and increased transparency requirements of Solvency II have the potential to affect captives more markedly than other parts of the industry.


Through equivalence—the adoption of similar legislation by different


jurisdictions—Solvency II also has the potential to have an impact on insurance companies outside of Europe. For European insurers, purchasing reinsurance from reinsurers in non-equivalent countries will potentially lower the capital relief they receive from such reinsurance.


Argentina, for example, is currently implementing a regulatory


change that requires insurers to repatriate their assets. Upon completion, Argentine insurers will be prevented from directly accessing overseas funds. While this directly impacts on international insurers and how they manage their investments, it also clearly affects captive owners as it is much harder for reinsurance premium for risks located in Argentina to be ceded to a captive.


After relaxing its reinsurance regulations a number of years ago,


the Brazilian insurance regulator, the Superintendência de Seguros Privados (SUSEP), recently announced that it will again restrict the amount of risk that can be reinsured to entities outside of Brazil. After sustained lobbying from organisations such as the Federation of European Risk Manager Associations (FERMA), SUSEP moderated its approach, and requires only 40 percent of any reinsurance to be placed locally. Negotiation on an individual basis is currently the best method to manage the process—in a recent example there was an agreement to cede more than 99 percent of the premium.


In Russia, two recent changes to legislation have further reduced


the potential for premium to reach a captive. These are the creation of a liability pool for casualty risks which are deemed ‘hazardous’ (this can be interpreted to include a premises operating a lift or escalator) and a potential limitation placed on reinsuring 100 percent cessions overseas.


Equally, with effect from February 1, 2012, Kazakhstan will effectively


increase the retention of risk within a local insurance company. With energy being a major industry sector within the country, energy


company captives will see a potential reduction in premium reaching the captive (although admittedly less risk will reach it as well).


An incidental impact There are also peripheral changes that impact insurance


placements in countries such as Ecuador. Although not in force yet, it is expected that a 5 percent tax will be imposed on funds remitted to entities outside the country. This measure does not impact just on insurance transactions, it also creates a cost for captive reinsurance programmes. Similar taxes apply in other countries, each eroding the premium that can be remitted to a captive under a reinsurance contract.


The continuation of non-admitted issues The challenge to programmes involving non-admitted coverage


also continues to grow. This applies equally whether it is a primary non-admitted coverage such as on a directors and officers policy, or an excess basis such as for a master policy providing difference in conditions or difference in limits. In countries where non-admitted contracts are permitted, for example, paying the applicable insurance premium tax to the local tax authority can prove problematic for a captive writing such cover on a direct basis. This can often arise due to simple administrative difficulties as opposed to any specific business reason.


Moving towards a compliant insurance programme can also


present challenges. In instances where the insurance premium tax has not been paid for prior years, concern can arise over how this is best managed. The issue of remitting premium taxes has become more focused following the Kvaerner case. Although it was settled 10 years ago, in the Kvaerner case, the European Court of Justice found on behalf of the Dutch tax authorities that premium tax for Dutch risks had to be paid in the Netherlands, irrespective of the fact that the contract was placed in the UK.


The European Union, under its Freedom of Services regime,


was among the first trade blocs to review this issue. The 2nd Non-Life Directive clarified the location of the taxable insurance cover, determining that it should be based on where the risk was located. This meant that premiums for global programmes had to be allocated by country in order that the appropriate insurance premium tax could be applied.


In countries where non-admitted insurance is not permissible,


both insurance regulators and tax authorities are taking far more interest. This has been evident in countries such as Canada. Legislation such as the Mutual Assistance Directive in the EU also makes it much easier and quicker for tax authorities to gain and exchange information in order to identify non-compliant companies.


Captive regulation The impact of Solvency II is a significant concern for EU captive owners,


as well as captive owners in jurisdictions that are seeking equivalence. Solvency II will change the way captives operate and, for a reasonable proportion, it may render the captive economically inefficient.


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