Nevertheless, Solvency II will raise the bar and there will have to be a response similar to the one we saw with US GAAP and IFRS convergence. The financial accounting standards board in the US didn’t want to merge and adopt the principles-based view of the world that IFRS brings, as it’s not simply a changing regulatory environment, but a complete change of mindset. In the US, we have much more of a rules-based regulatory environment, whereas under Solvency II there is more leeway as regards establishing a risk perspective. Essentially, Solvency II is moving towards a principles-based system and there are repercussions to that. You can’t simply stay with the old model, it will lose its relevance, and the competitiveness of those domiciles that continue with a rules-based infrastructure, will inevitably suffer.


Is there a concern that this kind of regulation will make captives less attractive?


It will have an effect—and it could be material—on interest in captives that are run for simple economic reasons. If it is just a tax-saving vehicle or a way to access the reinsurance market, then you’re going to have to secure more capital. Cost:benefit analysis might lead some to say, what are we running this captive for? However, if the captive was a vital part of risk management at the parent company level, then those captives are


“THERE IS NO ISSUE THAT BERMUDA IS GOING TO SEEK EQUIVALENCE, ADOPT IT AND DO WELL AT IT, BUT WHERE DO YOU DRAW THE LINE?”


already well capitalised, well run, implementing sophisticated enterprise risk management, loss control and engineering to prevent claims. Global corporations that run robust captives could not do without them from a risk management perspective. Going to the commercial market rather than bearing the risk themselves, they would not have the same tools they have in well run captives available to prevent and mitigate losses.


The change does represent an opportunity for the protected cell sector. Vermont recently added protected cell legislation to its books in an effort to provide tools for those marginally run captives as the domicile moves closer to global insurance standards. As cells buy products and


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56 bermuda captive 2012


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