Solvency II among drivers for rating European captives

18/06/2009

Interest in ratings for captive insurance companies is increasing, with Solvency II one of the major factors behind the rise in enquiries from European captive owners, according to AM Best.

At the rating agency’s Monday briefing at the 12th European Captive Insurance Rendezvous in Luxembourg this week, the company said there is a steady and growing interest in the relevance of financial strength ratings to captive operations.

“We’re seeing increasing interest here in Europe - not on the same scale as the US, but nevertheless it is gaining momentum,” said Clive Thursby, AM Best’s manager of Emerging & Alternative Markets.

“We’re not exactly sure why that is, but Solvency II has obviously crystallised certain issues which the rating process does address and therefore that might bring more cases forward for consideration,” he said.

“There’s still so much uncertainty as to how this is going to play out but some of the discussions we’ve had with risk managers clearly have Solvency II in the background.”

Nick Charteris-Black, AM Best’s director of Global Financial Services said the company has seen increasing interest in captive ratings in the past 12 months.

“Outside of the EU zone, there are a number of UK-parented captives in Guernsey and the Isle of Man, for example, which won’t be subject to Solvency II but might feel the need to show some other external verification and a rating might be a way to do that,” he said.

Charteris-Black said there are currently 20 captives rated by AM Best in Europe but he expected the number to increase to 30 to 40 in the next 2-3 years.

Thursby said there are various drivers behind this interest. “One is a corporate governance push, where there is a need for a group which is not otherwise engaged in insurance to be able to demonstrate its insurance subsidiary is being conducted in a proper manner,” he said.

In addition, he said: “There are perennial issues around fronting where a rating can be of assistance in unlocking fronting capacity on the one hand and doing so on favourable terms on the other.”

Thursby said AM Best has seen cases where a good rating on a captive has greatly improved the terms on which fronting was made available to it - by reducing collateral needs, for example.

He also suggested that any captive looking to expand beyond its core business into unrelated or even third-party business may need to demonstrate that it is good for its obligations.

“We are seeing more cases where a party in a joint venture says that if they’re going to use a captive it needs to have rated paper,” he said.