30 October 2013

ECIROA: Captive Industry Position on Article 78 SCRSC1

This letter and the accompanying documents present a number of outstanding issues that the European Captive Insurance and Reinsurance Owners' Association (ECIRIOA) looks forward to resolving with the Commission and EIOPA.

ECIROA welcomes and fully supports the definition of a captive insurance entity as set out under Article 13 of the Solvency II Directive (2009/138/EC). However, as currently drafted, Article 78 SCRSC1 narrows the definition of captives by placing restrictions on the types of captives that will be allowed to use the captive simplifications to calculate the solvency capital requirement. This operates against the principle of proportionality for captive insurance and reinsurance undertakings as called for in the Solvency II Directive.

Limitations under (a) and (b) (Article 78 SCRSC1) are so strict that they would effectively rule out at least 8 out of 10 captives from using the simplifications for captives.

The problem with the current wording arises because in today’s world major corporate group structures experience frequent changes. This is because major corporations (the captive owners) tend to have active mergers and acquisitions activities. This means that legal entities that are part of the group today might not be part of the group in 2 or 3 years.

However, group insurance policy issued today covers all group affiliates and, according to insurance law, these entities remain covered under the group’s occurrence based Third Party Liability Insurance (TPL). Therefore, where legal entities are sold, the coverage remains a “group risk” cover in line with the captive definition under Article 13 of Solvency II. Note that the captive is not insuring any new risks of the entity once it has been sold.

Given the importance of captives as a risk management tool for Europe’s largest multinational corporations, it is essential that Article 78 SCRSC1 is appropriately amended to reflect how the captive business model operates under the Article 13 definition and to ensure proportional treatment.

ECIROA understands and appreciates that the Commission would prefer to exclude any compulsory third party liability insurance by a direct insurance undertaking from making use of the simplifications. ECIROA’s suggested amendment to this.

In all cases of Reinsurance Captives writing TPL policies a commercial insurer is providing, via fronting policies, the necessary claims handling. In the case where a direct insurance captive writes non-compulsory TPL, this should not lead to complaints from and discussions with consumer protectionists due to the fact that corporations are not obliged to insure their liability risk as long as it is not a legal local requirement – there are companies which don´t insure their liability risk due to a sound positive claims experience and a sophisticated risk management activity.

The commercial insurers diligently check the Counterparty Risk and the claims paying ability of captives with their own experienced employees. For added comfort, they may request further security measures such as Letter of Credit, collateral or similar security. Beside this Credit Risk the reinsurance policies between the fronting insurer and the captive contain insurance technical clauses such as ‘Simultaneous Payment’ or ‘Cut Through Clauses’.

Full letter

© ECIROA - European Captive Insurance and Reinsurance Owners` Association