Solvency II will force captive closures

By Gavin Bradshaw 27/07/2009

Some European captive insurance companies will be forced to close as a result of failing to comply with the Solvency II Directive by the 31 October 2012 deadline, said AM Best in a new report.

The report, European Captives – a Growth Market During a Challenging Time? said stricter solvency standards and the ongoing economic crisis pose both long-term and immediate challenges to the European captive market.

AM Best said the growing financial and administrative burdens of compliance will drive some captives out of the European Union (EU), to non-EU jurisdictions such as Guern¬sey and the Isle of Man.

The AM Best report also reiterates the view that Solvency II will affect the global captive market as it brings pressure to bear on other domiciles to implement their own tougher solvency standards, to increase regulatory oversight and to promote greater transparency.

The report’s authors say that the credit crisis has led some parent companies to tap into captive reserves to provide much-needed cash.

They suggest that in order to unlock further capital and reduce uncertainty, some companies may pass all or part of their captives to third parties, supplying the catalyst for a “latent captive buyout market”.

Other trends identified by the report are the increasing interest from Latin America and the Middle East in European alternative risk transfer models. Captive markets in both regions are currently underdeveloped.

In addition, said AM Best, while the captive market is likely to develop despite these challenges, growth will shift away from the formation of pure captives toward cell captive use.

The report goes on to say that while captives have been recognised under Solvency II and will be regulated according to a proportionality principal, the precise impact of this regulation has yet to be determined.

In the case of those captives writing third-party as well as parent company risks, there still exists uncertainty around whether such vehicles will be treated like other insurance companies or as captives.

The Federation of European Risk Management Associations (FERMA) recently expressed disappointment at the minimal response from insurance brokers and small and medium-sized insurers to the Solvency II consultation process.

FERMA’s comments followed the 2 July publication of the Committee of European Insurance and Occupational Pension Supervisors’ Solvency II consultation, which has an 11 September deadline for responses.