Solvency 2 and captives – a SWERMA perspective
Some especially important Pillar 1 issues:
By way of introduction it’s noted that CEIOPS (see footnote 2) in
reference to Article 111 (j) makes certain proposals to simplify the
calculation of capital requirement for captives under a standard
formula. The simplifications concern calculations of “market interest
rate risk,” “market spread risk,” “concentration risk” and “non-life
underwriting risk module.” Among the proposals there are also
simplifications for insurance companies which reinsure themselves
through a captive.
Moreover captives, in accordance with Article 109, have the
possibility to apply the same simplifications of the standard formula as
other insurance companies. There also exists room for captives to
apply the same so-called company specific parameters in accordance
with Article 110.
It’s further noted that in Article 129 (d) there are special rules for
captives on reinsurance that even refer to the minimum capital
requirement. Finally of note, it’s assumed in Article 86 that in carrying
out the regulations there is room for applying the simplified methods
and techniques to calculate the technical provisions for captives
among others. To sum up, it can be stated that in several sections
within Pillar 1 particular recognition has been made to the unique
character of captives and that any point of view of those sections
should wait until SWERMA has obtained the final proposals for Level
2 regulation.
Against the background of captives’ particular activity it’s customary
for captives to lend money to the parent company through internal
loans. For captives it is important that this type of internal loan, that
is to say claims on the parent company, are treated in a way that is
economically fair. Specifically, it must be fully recognised as an asset in
the Solvency II balance sheet, and so may be used to cover the
technical provisions.
Regarding the Pillar 1 regulation it should be pointed out in particular
that many captives have equalisation reserves in their balance sheet,
and it is as important for captives as for other insurance companies
that in the implementation of the directive it is established that this
safety reserve is accepted as so-called tier 1 capital.
Some crucial Pillar 2 issues
Against the background of captives’ particular nature, it is relatively
standard for companies to outsource part of their organisational
tasks. It’s usual, for example, that staff employed in other parts of the
group hold roles such as board member or chief executive in a
captive and that the insurance administration is outsourced to
contractors outside the group.
Even though many captives have a relatively simple and small
organisation, there are others which have many employees and a
more complex organisation. The actual organisation of each captive
company is for obvious reasons adapted to the preconditions of the
operations.
The Solvency II directive contains demands on insurance companies’
management systems, which among other things include demands on
different partial systems and functions. From article 41.2 of the
Solvency II directive it arises that insurance companies’ management
systems must be in proportion to the company’s nature, size and
complexity. It’s further evident from argument 31 that the directive’s
demands about different functions do not prevent companies from
freely deciding how these functions are organised in practice, unless
otherwise stipulated in the directive.
In the same argument it’s also stated that functions can be held by
employees, carried out with the help of outside experts or
interpreted by experts within the framework of restrictions set by
the directive. It’s noted that the directive contains no requirements
as to the exact number of employees and that the only organisational
restriction arising out of the directive requires that the function of
internal audit be objective and independent in relation to the
operating functions of the company.
In CEIOPS’ concluding advice on implementation measures as far as
“system of governance” applies there is no expressly particular
regulation for captives, which can result from CEIOPS’ view that
details on how the principle of proportionality “applies” cannot be
regulated in a principle-based system.
Against this background SWERMA wants to underline the
importance that proportionality in issues of the demands on
managements systems required by the directive has concrete
counterweights for captives in the Swedish legislation and its
adaptation.
For captive companies it is namely important that the future
regulation is clear when it comes to the possibility of allowing a
person who is employed in a captive company to be responsible for a
so-called key function. The regulation must also be clear on the
potential to permit one and the same person to hold several
functions, and especially the opportunities to combine several tasks
with the duties of board member or managing director.
Against the background of captive companies’ business model, it is
important that the regulations and the interpretation of activities are
clear regarding for example definitions and when it comes to any
restrictions on the ability to interpret activities which actually exist
against the background of demands in article 49 of the directive.
For captive companies, it is important that the requirements on
management as a collective and on individual board members are in
accordance with the activity involved. More to the point, there is no
justification for example to place obligations on an independent board
member in a captive company’s management, since potential conflicts
of interest in captive companies are of a different nature from those
that may exist in other insurance companies.
It’s further important that the suitability requirements on individual
board members are not crafted in such a way as to stop group’s from
nominating board members outside of the group’s internal needs. In
particular when it comes to the obligations on the collective
ompetence of a captive company’s management, regard must be
made for the relative small size of the captive market which means
the number of available experts is limited.
It should be mentioned that SWERMA does not see the need for any
form of EU-wide certification of board members (There are reports
that certain member states believe that this type of requirement
should become part of the legislation) unless any such certification
takes account of captive companies’ special situation.
Some key issues in Pillar 3
Under article 53 of the Solvency II directive the regulatory
authorities must allow insurance companies to not disclose certain
information in certain cases. Publication can be for instance avoided
in cases where a firm’s competitors would gain an undue advantage
by the publication or where the company is bound by an obligation of
secrecy by its relationship with corresponding parties.
Since there could be business as well as security reasons for not
disclosing for instance a captive company’s various risk exposures it is
important for captive companies that there be clarity in regulation of
companies’ possibilities to avoid such disclosure.
On the question of obligations for the publication and routine
reporting to the regulators, SWERMA wishes to point out the need
for proper analysis of the consequences when the actual demand for
and usefulness of the information in question is set against the costs
of providing such information.
SWERMA holds that the need for such analysis is especially important
when it comes to obligations on captives to provide information
since it can be assumed that the so-called market need for
information regarding captives is comparatively limited against the
background of the firm’s specific activity.