Federation of European Risk Management Associations
Laurent Nihoul, board member and chair of the captive committee at the Federation of European Risk Management Associations (FERMA), discusses the impact of regulatory concessions under Solvency II for captives, classified as ‘small and non-complex undertakings’
The introduction of ‘small and non-complex undertakings’ marks a significant evolution in the regulatory framework. How does this classification mechanism fundamentally change the landscape for captive insurers?
The introduction of the concept of small and non-complex undertakings (SNCU) will first and foremost introduce much greater clarity and consistency across the captive environment of EU member states.
Since the introduction of Solvency II, the application of proportionality has varied significantly across countries. For example, jurisdictions such as Ireland, with its Own Risk and Solvency Assessment (ORSA), and Luxembourg, through its quarterly reporting, have implemented proportionality to different extents.
Additionally, some countries, including the Netherlands and Ireland, adopted a classification system for insurance carriers based on size and complexity, enabling a more tailored regulatory approach.
Most captives in the EU will meet the SNCU criteria, which will allow them to implement a more proportionate and therefore less onerous interpretation of the prudential rules. It is, however, hard to say at this stage whether there will be a dramatic shift once the changes to Solvency II are fully embedded, as it depends on every individual captive’s own resources and risk profile.
However, from a market perspective, this will be a positive development and enhance the attractiveness of operating a captive in the EU, as it should be less burdensome from a prudential standpoint.
The legislative shift in the burden of proof to National Competent Authorities (NCAs) for SNCU classification challenges represents a notable departure from traditional regulatory dynamics. How might this recalibration influence the strategic decisions of captive owners and their domicile selection process?
This is the second key change that has been introduced. Undertakings classified as SNCUs will be allowed to use all proportionality measures, except where the supervisory authority has serious concerns in relation to the risk profile — unless these concerns are duly addressed.
Obviously, member states have the discretion to go beyond this. Observations have led to slightly different interpretations of Solvency II across EU jurisdictions. The shift in the burden of proof implies that the criteria set by the directive in Article 29a are standard and uniform across member states. An undertaking that meets those criteria will be classified as an SNCU unless exceptional circumstances exist.
Because the new text lays out clear criteria and categorises compliant insurance or reinsurance companies as SNCUs, it establishes a clear principle that FERMA believes will increase consistency and predictability across EU member states.
The revised framework introduces more nuanced reporting schedules for SNCUs, including extended intervals for ‘regular supervisory reports’. How do these modifications align with the sophisticated risk management frameworks typically employed by captive operations?
We do not see any contradiction between maintaining sophisticated risk management frameworks and reducing the frequency of some reporting requirements. It is crucial to distinguish between these two aspects: the process necessary for internal risk management and governance, and the requirement to disclose related information in a suitable format.
Most captives in Europe have a very simple underwriting approach, operating across a small number of insurance lines and maintaining a relatively simple reinsurance structure. Year-to-year, their approach typically undergoes minimal changes, so updating their ORSA annually would result in a disproportionate burden to benefit balance. We do not expect sophisticated captives to change the frequency of their current processes, but they will have the opportunity to reduce the reporting workload.
The specific relaxation for captives regarding cross-border and reinsurance criteria appears to acknowledge the unique nature of captive operations. How important was this?
This was a key topic in FERMA’s discussions with the European Insurance and Occupational Pensions Authority (EIOPA) and EU authorities. The initial criteria set out in Article 29 permitted only a very low level of reinsurance business and/or cross-border activities to achieve SNCU status. FERMA exerted significant effort to clarify that adhering to these criteria would prevent most captives from qualifying as SNCUs.
This is because captives, by their very nature, engage in reinsurance-based business and leverage the geographical diversification of their group. The authorities removed this criteria for captives after some time, recognising the unique nature of their operations.
In an era where climate risk is becoming increasingly central to insurance operations, what strategic advantages does the exemption from climate change scenarios offer captive insurers, and how might this influence their role?
Captives have become an increasingly prominent and integral component of how larger organisations finance risk. As environmental, social, and governance (ESG) priorities have risen up the corporate agenda, the remit of the captive has naturally expanded to cover ESG and climate-related risk processes. However, in this context, most captives face the issue of proportionality, as the burden of reporting on these processes often outweighs the benefits.
How could enhanced flexibility reshape captive organisational structures while maintaining robust risk management and control frameworks?
The focus is not on reshaping captive organisational structures, but rather on ensuring the retention of previously permitted structures, ensuring greater clarity and consistency across Member States. This is key for captives, as the lean management and governance processes are a core aspect of maintaining the overall efficiency of the vehicle — maintaining low operational costs and optimising risk financing.
The exclusion of compulsory third-party liability insurance from SNCU-qualified captives presents an interesting constraint. How might this influence the evolution of captive structures and their integration within corporate insurance programmes?
Compulsory third-party liability insurance examples are pretty limited — the best example is motor liability, which is a legal requirement almost everywhere. In addition, the terms and conditions of these compulsory covers are very often strictly defined by law, which means that very few captives are interested in writing them, as they are very specific to the countries they are enforced in, have limited or zero underwriting flexibility, and can have strict compliance criteria. Therefore, I do not expect that this exclusion will have a significant impact on captive structures, as almost all international corporate programmes focus on non-compulsory covers.
Following EIOPA's consultation on the proportionality framework implementation, how do you think the industry's feedback will shape the development of technical standards, and what implications might this have going forward?
This is an important point. FERMA has worked hard to make sure that EIOPA keeps its political promise to add more proportionality to Solvency II while more technical standards are being made. We engaged with EIOPA as part of a workshop, submitting our view that Article 29a is a clear and positive step forward for the (re)insurance industry in the EU. FERMA aims to prevent any additional complexity in Solvency II's next-level details.
We therefore hope that EIOPA’s future guidance and opinions on the proportionality measures in the directive aim to clarify or simplify. In terms of timeline, it is very close to January 2025, so the consultation that EIOPA ran is unlikely to have any real-world impact in the short-term. FERMA continues to be attentive to the potential medium-term effects of EIOPA's industry engagement in developing guidance for national supervisors during the implementation of Solvency II changes.
