Europe’s natural selection

Vicky Beckett

The steep increase in capital requirements under Solvency II makes European Union domiciles out of reach for many smaller captives. Not only will higher capital requirements cause a stumbling block but there are other issues, such as fronting costs and the commercial market repricing products and reorganising the packages in which these products are sold.

The UK, followed by Ireland, has reported the highest number of figures in requests for approval for internal solvency models. Ian Clark, insurance partner at Deloitte, said that internal models give much more insight into insurers’ businesses and where they are making and losing money with products. “That will in turn lead to further analyses of what insurers are doing and how they price business. Insurance companies will be getting much more sophisticated as a result,” he said.

Mike Sands, senior partner of Menzies, a UK accounting firm, said that if Menzies’ Guernsey captive was required to be Solvency II compliant, “the costs would just blow our captive out of the water”. Keller Engineering’s Isle of Man captive does not currently write any business into the EU. Jackie Holman, Keller Engineering company secretary, said: “We aren’t considering a subsidiary, cell or branch captive in the EU to write business directly. However, if the Isle of Man was to seek Solvency II equivalence, we would clearly need to consider alternatives.”

The issue of cost is less of a problem for international corporates such as UPS, however. Mike Squibbs, UPS European region risk manager, said: “We wouldn’t redomicile to a non-EU jurisdictionas we need to write business directly into Europe.” Clark argues the crux of the issue is proportionality in regards to Solvency II. “There is a lot of press comment and some noise coming from European authorities that they will apply proportionality to captives but there’s no detailed analysis of this. In the absence of any proportionality definitions, the cost of operating a captive is an issue. In this kind of environment, EU domiciles become quite unattractive to captives. It’s more about ‘is my captive in the right place’ than ‘is my captive still valid’.”

Squibbs said that even if insurers were to reprice and reorganise their products, the risks covered by the captive would be unlikely to change as UPS buys reinsurance from the commercial market. Therefore the effects are unavoidable. He said: “We are concerned about Solvency II, but we haven’t completed a full model yet. We need to understand the way Solvency II is going effect the reinsurance market. In a way, capital requirements are not too much of a problem for a large company like UPS until we get the final figure,” he added.

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