General Insurance Article - Captives must embrace Solvency II or lose their purpose

 Captives that have embraced the regulatory challenges head on rather than dragging their feet will come out stronger and serve better the purpose they were set up for in the first place; to provide cost efficient insurance cover for the parent company.

  

 “There is no escaping from the fact that captives in the EU fall under the scope of the Solvency II directive, even if it has not been welcomed with open arms by the industry. Whilst complying with the directive will inevitably give rise to additional costs for captives, such fears are irrational with the long term benefits of a risk based capital regime outweighing the short term compliance cost for most.

  

 “Captives will have no choice but to align their own capital adequacy to that of the fronting insurers who are also under pressure to maintain a capital buffer under Solvency II. Fronting insurers are likely to only seek out business with captives with a stronger capital base and high credit ratings, the alternative is being penalised with additional capital requirements in respect of credit risk for lower rated captives.

  

 “Captives should take lessons from the leading insurers in understanding the opportunities of Solvency II, in particular by reviewing their business models. Some captives have already added or are thinking of adding new lines of business to benefit from greater diversification while others are considering better reinsurance programmes to manage risk and capital requirements. We are also seeing more integrated risk management akin to the primary insurance market in larger captives.

 “Solvency II principles aligned to strategic goals can ultimately only be good for business.”