Many European captives have embraced Solvency II’s increased regulatory requirements as an opportunity to focus more closely on risk management and refine their investment strategies, according to an A.M. Best report.
A.M. Best suggests that the European captives it rates are using the information they have gathered to meet Solvency II’s qualitative and reporting requirements as an opportunity to also review their business models.
Solvency II has been a contributor to captives coming under greater pressure to justify their existence.
Parent companies have been reviewing the logics for operating more than one captive and A.M. Best has noted a realistic response to mitigating the cost and reporting strain. For instance, parent companies with more than one captive have considered economic efficiencies by transferring risks to just one captive.
As Solvency II’s capital requirements under the standard formula will often be demanding to insurers that do not generate a large level of diversification benefit in the calculation, parent companies have also been reviewing the acceptance of new risks in existing captives to increase diversification.
A captive that is able to accept different risks would ultimately be of increased importance to its parent.
A.M. Best notes that its rated captives mostly view the higher costs from upgrading risk management and governance as offset by the benefits that a better understanding of their risk profile provides.
