Industry professionals called for proportionality and harmonisation in the implementation and enforcement of Solvency II in a panel discussion at the European Captive Conference in Luxembourg.
Fabrice Frère of Aon Global Risk Consulting focused on the Pillar II requirements. He said that the system of governance for Solvency II must not be seen as simply a “paper” exercise, and noted that there is a level of comfort for captives in being in control of what is happening.
While captives have always practiced self-governance, the new rules have caused them to approach this more proactively.
But Frère suggested that some regulators are not being proportionate in their governance of captives, noting that many have been “adamant on the implementation of key functions”.
Implementing additional requirements for board members and head of key functions can lead to these positions being promoted to ‘officer’ level, which is unnecessary for a captive, he said. This could led to work being completed and checked multiple times by different individuals, creating inefficiencies in the reporting process.
While accepting that key functions reporting to the board is an important safeguard to make sure Solvency II is followed, Frère said: “I would like to call for proportionality on that.”
He added that documentation and clear audit trails are key to this, and suggested that additional scrutiny from external auditors and additional disclosures and reconciliations can quickly become over-burdensome and non-proportionate.
According to Frère, regulators must work with the industry to find the right balance, and a “proactive approach to the regulator does pay off”.
He added that “effective” governance is “much more efficient than comprehensive”.
With regards to Pillar III requirements, Derek Bridgeman of Marsh Captive Solutions noted that, although it is earlier in the implementation process than Pillars I and II, so far, proportionality in Pillar III has been applied.
There is a risk that this could change, with some domiciles choosing to bring in validation checks at regular intervals. The Netherlands, for example, is insisting on audit requirements on its reported data, which Bridgeman said has proved “troublesome”.
Bridgeman suggested that the regulators should cooperate to publish guidance on how proportionality is being implemented in different domiciles, suggesting that such a comparison could help achieve more harmonisation going forward.
