23 January 2020

Commercial Risk Europe: Ferma and ECIROA flesh out proposals to boost proportionality for captives under SII

The EIOPA must use this year’s Solvency II review to recognise that national supervisors have so far failed to apply the principle of proportionality (PoP) to captives and force the issue by issuing clear guidelines, according to risk management federation Ferma and ECIROA, the captive owners body.

Ferma’s approach provides a framework for national supervisors to use in determining which criteria and elements should be taken into account before assessing if and how an insurance undertaking can benefit from the proportionality principle.

Both bodies made clear and rational proposals to EIOPA about how the PoP could be applied in a much more harmonised and legally sound manner across the European Union.

By doing so, they have effectively allied with leading European insurer bodies such as Insurance Europe and the Association of Mutual Insurance Companies in Europe (AMICE), which have also called for a more consistent use of proportionality under Solvency II. The insurance bodies are concerned that smaller and specialty insurers are being burdened by unnecessary capital and reporting rules designed for bigger insurance groups that pose a potential systemic threat.

“Ideally, each national regulator will evaluate the risk profile of an insurer against the two main Solvency II objectives – consumer protection and financial stability – in a consistent manner, while maintaining flexibility in the degree of the proportionality measures,” Ferma explained.

The federation explained that its suggested approach would not require any legal change to Solvency II. The supervisor’s flexibility in the final choice of proportionality measures would be maintained. But importantly, the supervisors would use the same holistic, risk-based framework common across the EU.

ECIROA has also proposed a more consistent and clear methodology for the application of proportionality that it says would represent a “win-win” for both captives and supervisors, based on its cost-benefit analysis. It said that EIOPA should advise the European Commission, when it presents it Solvency II reform proposals in June, that the PoP should be automatically applied to captives based on the number of insurance contracts they write.

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