12 December 2013

CRE: ECIROA 'optimistic' captive definition will be relaxed under Solvency II

ECIROA recently wrote to the Commission and the European Insurance and Occupational Pensions Authority (EIOPA) to explain that eight out of 10 European captives would fail to qualify for simplified solvency capital treatment under Solvency II as the Directive currently stands. This is because they carry liabilities underwritten for disposed entities. Under the current translation of the Directive this would mean that they do not qualify for proportional treatment because they are no longer only writing business for first party parent company risks.

A very strict interpretation of this rule would mean that risks of disposed operations effectively become third party risks. This would remove a core requirement for being allowed proportionate treatment and mean that many captives would be liable for more onerous capital and reporting requirements.

The association wrote to the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA) to ask them to change the rules so that the loophole is closed.

Günter Dröse, former head of insurance at Deutsche Bank, now an independent risk management consultant and head of ECIROA, said that, as yet, he has not had a formal response to the letter from the Commission or EIOPA. But Mr Dröse said he is confident that they understand the problem, do not want to penalise captives unnecessarily and will react positively to the association's request.

Captives are of course not the main thrust of the Solvency II Directive and clearly groups such as ECIROA and FERMA have to fight hard to have this 'minority' interest listened to and indeed understood. But Mr Dröse said that he gained the 'impression' that ECIROA had managed to convince the Commission and EIOPA that for pure captives the definition has to be changed and that the authorities do understand the need for amendments.

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