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"Captives in general should not have a problem implementing Solvency II next year, although there is the potential for some confrontation with local supervisors where interpretation of Solvency II remains open, most notably around how the principle of proportionality is applied," said Mr Dröse.
Proportionality is likely to be the biggest issue for captives, which are essentially subject to the same rules as commercial insurers and reinsurers under Solvency II, explained Mr Dröse. There is little guidance on how the concept of proportionality-which gives national supervisors the option of reducing the regulatory burden for less risky insurers-will be applied to captives, he said.
Challenges over proportionality will revolve around 'simplification without reducing', according to Derek Bridgeman, Vice President of Captive Solutions for Marsh in Dublin. For example, captives will have to produce the relevant corporate governance and risk management framework policy documents, however, applying proportionality, the process will not be as onerous as for commercial insurers, he said.
Core rules around solvency, governance and quantitative reporting are 'stable', enabling captive owners to prepare for Solvency II, according to Mr Bridgeman. However, there are a number of areas where clarification is required, he said.
ECIROA has been working with EIOPA and the European Commission to iron out outstanding issues for captives that require clarification. For example, the definition of a captive under the directive could restrict captives' ability to underwrite third party liability risks, explained Mr Dröse. This is an issue that has yet to be resolved, although EIOPA is in discussion with the Commission, he said.
There are also unanswered questions for captive owners around equivalent regulation, under which European regulators will recognise insurance supervisory regimes in jurisdictions outside the EU. The Commission is currently negotiating so-called mutual recognition with regulators in Bermuda, Japan and Switzerland.
Equivalency has implications for the treatment of fronting insurers and reinsurers located outside the EU, potentially adding costs for captives, said Mr Dröse. While the Commission has given guidance on equivalency it has not explicitly referred to captives in the case of Bermuda, a major captive and reinsurer domicile.
Mr Bridgeman believes that captives are unlikely to be included in the EU's equivalency agreement with Bermuda. As a result, captives based in Solvency II domiciles that insure a large policy limit and purchase reinsurance from a sister captive outside the EU-such as Bermuda or the British Virgin Islands-could potentially face higher counter-party charges under Solvency II.