21 June 2017
Reporter: Becky Butcher

A.M. Best: SFCR analysis shows strong solvency ratios for captives

A.M. Best has obtained and analysed the Solvency and Financial Condition Reports (SFCR) from its rated European captives, which found that solvency ratios are “very strong”.

The analysis comes after single entity risk carriers in Europe were required to publicly disclose a SFCR as part of the Solvency II regime by 20 May. The report provides an insight into the company’s financial condition as at 31 December 2016.

In A.M. Best’s new report, titled Solvency II Disclosures Demonstrate Strong Capital Positions for European Captives, it revealed that Solvency II ratios for the reviewed sample of captives range from approximately 160 percent to 240 percent.

A.M. Best explained that this finding is “in line with expectations” as the captives it rates tend to be well capitalised.

The ratings agency suggested that the disclosure of own funds and the composition of solvency capital requirements show that own funds for each analysed captive is composed exclusively of unrestricted Tier 1 capital.

Konstantin Langowski, financial analyst at A.M. Best, suggested that the ratings agency observed “notable differences” in the style and quality of the narrative part of the disclosures among its sampled captives, in particular in the description of governance and risk structure.

Langowski added: “Most A.M. Best-rated captives are able to articulate and illustrate their risk management framework and capabilities as part of the interactive rating process. However, in A.M. Best’s view, the disclosures fail to do justice to the risk management and governance practices of the captives, as well as to demonstrate the importance of these functions to captives and their parents.”

The briefing also suggested that some captives have doubt around the regulatory objectives to improve market discipline and policyholder protection by means of public disclosures in light of captives’ business models.

However, A.M. Best points out that most captive managers appreciate that the overall implementation of Solvency II has improved their general risk management capabilities and enabled them to manage their capital requirements better on a risk-adjusted basis.

Pillar III of the Solvency II directive aims to harmonise and improve the transparency of financial disclosures to the market, as well as enhance consumer protection.

The purpose of the report is to impose greater market discipline and confidence, as well as the overall objectives of the Solvency II regime of creating a stronger and more uniform regulatory environment for capital adequacy and risk management.

Click here to read the full A.M. Best briefing.

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