Aon Risk Solutions
Captives critical of Solvency II are finding that regulators are carving out exemptions to the legislation for them. Gaynor Brough and Richard Bray of Aon Risk Solutions explain more
What benefits does the bifurcated approach to implementing Solvency II bring to the Isle of Man as a captive domicile, compared to the likes of onshore jurisdictions such as Dublin and Malta?
Gaynor Brough: Broadly, captive owners have been critical of Solvency II, believing that it is over-engineered for captive business and not fully recognising the reduced risk to third-party policyholders. A bifurcated approach would allow the Isle of Man to maintain its position as an attractive jurisdiction with a regulatory framework that is proportionate to captive business, while taking into account the strong life sector on the island.
Richard Bray: The Isle of Man has a policy of maintaining a high degree of compliance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) and is currently in the process of developing its insurance regulatory framework to take account of changes in the ICPs.
According to the Application Paper on the Regulation and Supervision of Captive Insurers, which was issued in November 2015, ‘high-risk’ captives, those that write third-party business, should be treated like commercial insurers by regulators. How will the Isle of Man approach the regulation of these captives in its IAIS review?
Brough: Ordinarily, any insurer that writes third-party business should be subject to commercial or near commercial regulatory standards. However, there are some instances where reduced standards might be permissible. For example, reduced standards might be applied when the policyholder is a sophisticated party and is entering the contract on an informed consent basis. The Isle of Man is currently considering this and other potential exemptions within its market.
Capital adequacy requirements have been adjusted for solvency purposes to ensure that insurers can absorb significant unforeseen losses while also providing for varying degrees of supervisory intervention. What approach will the Isle of Man take to make updates to this principle?
Bray: The Isle of Man is in the process of further development of its insurance solvency regime. This includes, for example, more detailed minimum requirements in the setting of technical provisions for regulatory solvency purposes, as well as more specific guidance on enterprise risk management, including own risk and solvency assessments to further supplement capital adequacy assessment. Proportionality will be a consideration when undertaking this exercise.
Captives typically pose reduced risk to external stakeholders and to the financial stability of the insurance market, according to the IAIS. How will the Isle of Man implement reporting to monitor solvency, assess compliance with legislation and identify potential problems?
Brough: In its development programme, the Isle of Man is anticipating refining its current model. This is based on periodic regulatory returns and on-site inspections, which feed into ongoing regulatory monitoring and assessment. The framework will also maintain broad powers for the Isle of Man Financial Services Authority to amplify regulatory scrutiny on a case-by-case basis where appropriate.
What regulatory initiatives is the Isle of Man undertaking to remain attractive to new forms of business, such as ILS?
Bray: The island has in place its insurance special purpose vehicle (ISPV) framework, which is specifically designed for insurance-linked securities (ILS) and similarly styled business.
This framework was designed following consultation with a leading global ILS broker and other users of ILS structures, which produced a robust, proportionate framework.
This in turn provides transparency to applicants and speed-to-market with a five-day regulatory decision turnaround. It can be used for a variety of structures, including catastrophe bonds, mortality bonds, sidecars and industry loss warranties, as well as other collateralised reinsurance structures.
The Isle of Man already has incorporated cell company and protected cell company legislation in place, which supports the ISPV framework.
The ISPV framework reflects the regulator’s ability to respond to changes in the regulatory and economic landscape and develop legislation in close consultation with the industry and the Isle of Man’s Department of Economic Development.
Further regulatory initiatives are ongoing, as would be expected with the ever-changing insurance and economic environment.
