Regulation Watch: Big win for risk managers using captives

On 14 December 2023, the Council of the EU and the European Parliament reached an agreement on the amendments to be made to the Solvency II directive, the EU’s primary prudential rules for the (re)insurance industry

This marks a significant development in the long-running efforts of FERMA and the wider risk management community to bring about amendments to the directive that will deliver greater proportionality for captive insurance companies.

The introduction of Article 29a creates a “small and non-complex” undertaking – broadly, an undertaking that, due to its nature, scale, and complexity is deemed as posing less risk to the system.

If a captive meets the criteria outlined in the Article it can ’benefit’ from proportionality measures such as reduced reporting frequencies and simplified governance requirements.

There is also a derogation from the Article that would see captives qualify if they have, e.g., no compulsory third-party liability insurance in the undertaking and that all insureds are either legal entities of the group, or natural persons covered under group policies.

IMPORTANCE FOR RISK MANAGERS

For those qualifying as a “small and non-complex” undertaking, risk managers will be faced with less onerous demands with respect to their compliance requirements.

This should heighten the appeal of the captive insurance structure as the company will essentially be easier to run, while encouraging others to broaden the use of existing captives.

Article 29(a) will also create a defined process to secure small and non-complex status. Undertakings will have to demonstrate with supporting evidence that they comply with the criteria in the Article directly to their National Competent Authority (NCA).

This of course means the NCA may still decide the undertaking does not qualify. Unfortunately, automatic qualification is not included in the revised Directive, so the onus is very much on the captive owner to prove they qualify.

As a result of Article 29(a), there could be a knock-on effect on NCAs in terms of sensitivity to or understanding of captives, which may provide some assistance to risk managers considering reshoring captives.

WHAT’S NEXT?

This process has been a lengthy one. Since 2018, FERMA has been presenting to the European Insurance and Occupational Pensions Authority (EIOPA) and outlining the divergences in approaches to proportionality – a key principle of Solvency II - across EU Member States.

The finishing line is in sight, but there is still a final sprint ahead. This will involve the formal approval procedure by the EU Member States’ representatives and the European Parliament, expected in late April, which will effectively rubber stamp the amends.

Once adopted, the amended rulings would come into force at least 18 months from that date – the time allowed for transposition into national law.

This creates a window for the market to familiarise itself with the amended text and its implications. FERMA’s Captives Committee will now focus on providing risk managers with full guidance on these changes.

FERMA will also be vigilant on the ’Level 2 activity’ relating to the implementation and technical standards, which will be driven by EIOPA.

We must continue to work with our risk associations’ members to ensure the national roll-out of Solvency II will truly embed the principle of proportionality.