The Federation of European Risk Management Associations (FERMA) has called for captives to be automatically classified as low-risk profile undertakings in the European Commission’s review of the Solvency II regime. In its position paper, FERMA says it “welcomes the significant strides made in the Commission’s proposed amendments to Solvency II in regards to proportionality, in particular the new classification of ‘low-risk profile undertakings’”. This includes the Commission’s formal recognition that captive insurance and captive reinsurance undertakings present a specific risk profile that must be taken into account when defining some requirements. However, the association continues that the regime could be further amended to reduce complexity for small insurers. The position paper states: “We believe that Solvency II could be even more proportionate for captives, which both operate in a very specific risk profile and provide European enterprises with a different option of risk transfer, which is crucial in current market conditions. “FERMA therefore calls for captives to be treated automatically as low-risk profile undertaking, based on their specific low-risk profile — that is, unless the captive poses a systemic risk or has been in breach of its solvency requirement in the last three years.” The association estimates that between one-quarter and one-third of its members use or manage captive insurance and captive reinsurance entities. These members will be directly impacted by changes to the amount of capital needed to meet reporting requirements in the Solvency II review. In addition, these members will be indirectly affected as any changes to capital, risk management or disclosure requirements for insurers will impact their individual and corporate clients. FERMA concludes: “Captives are an essential part of a vibrant and competitive EU insurance market. The role that captives play in supporting European enterprises expanding the scope of available insurance coverages, in reducing total cost of risk, in consolidating and mutualising group risks, and in leveraging and increasing the negotiation power of a multinational corporation towards the traditional insurance market, could be viewed as particularly important at this juncture where insurance coverage for several large risks is diminishing.”
