Simon Phillips
Barclays Corporate & International Banking

Regulators across the EU are taking diverging approaches to the level of capital they are expecting captives to hold post-Solvency II, says Simon Phillips of Barclays

What impact has Solvency II had on captives?

Captives in EU jurisdictions and those that have achieved or sought equivalency have to comply with the new capital rules that Solvency II brings. We are aware of differences in interpretation and application of the rules by different jurisdictions, suggesting that careful analysis of each regulator’s position in respect of Solvency II is required.

What challenges are captives facing?

The additional requirements for compliance with Solvency II place an extra burden on the captives, or rather on the captive managers, and it seems likely that there may be pressure on the fees that captive managers wish to charge for their services. We have also observed in one particular jurisdiction where there are no sufficiently rated banks to keep the capital requirement at a reasonable level that those captives are seeking to hold their capital elsewhere in the EU with an adequately rated bank.

Many countries will be expected to subscribe to the base erosion and profit shifting (BEPS) framework that has been put together by the Organisation for Economic Cooperation and Development (OECD), which will involve enacting or adjusting local legislation. However, the framework is not reflective of the unique position that captives are in and further consultation is likely.

Has there been any negative impact on captives since the implementation?

The additional burden on reporting is not consistent across the EU, with some regulators expecting captives to report the detail of a fully blown insurance company rather than reflecting the single parent, mostly single insured, nature of the insurance vehicle.

When looking at the impact of the increase in UK insurance premium tax on UK insurance transactions, it is expected that there will be reviews of the number and scale of transactions that some companies put through their captives.

With Solvency II came increased capital requirements for insurers. Have captives struggled with this at all?

It is possibly too early to say whether captives are struggling with the increased capital requirements and certainly the impact on their profitability and operations will be observed as the new regulations rally take effect. Again, the attitude of the regulators to these new rules will be a key consideration for captives.

What are the advantages for captives domiciling in the EU?

The advantages for captives domiciling in the EU are unchanged with the ability to issue compliant documentation across the entire market being the most prominent benefit. These should be weighed against the increased cost of Solvency II compliance.

At Barclays, what feedback have you received from clients and their experiences?

The main observation we have is that the regulators in the different jurisdictions are taking different approaches to the level of capital they expect captives to hold. The captive managers are certainly heavily involved in pulling together the Solvency II reports and therefore have an interest in understanding and comparing compliance requirements across jurisdictions.

In addition, for Barclays, it is likely that there will be additional reporting requirements for assets held within investment portfolios that we manage for our captive clients.

Are there any implications for captives following the project initiated by the OECD around BEPS? What should they be working on?

Many corporate structures are open to scrutiny as to their true purpose, with a particular focus on whether they are primarily being used to mitigate tax, even if this is within the letter of the law.

As we know captives do have a very important part to play in the management and transfer of insurance risk, and from a BEPS perspective, there a number of key points captives should consider:

• Substance: does the captive have appropriate resources to support the risk it is writing in the jurisdiction where it is based?
• Capitalisation and pricing: is the captive appropriately capitalised for the business it is writing and are the risks priced appropriately?
• Governance and control: are the decisions being taken by the appropriate people in the right jurisdiction and where are those risks being managed?
• Business purpose: what value does the captive bring and is it involved in writing appropriate risk for the owners and shareholders in line with their activities?
• Documentation: this point really brings together all the previous points in ensuring that everything the captive does is appropriately documented, in particular any decisions that are taken.

So, BEPS for captives is relevant, but should not hold any concerns for captives that have been formed for appropriate insurance or risk transfer reasons.

The important factor is making sure that the structure, business written and governance around the captive clearly demonstrate that the captive does have a clear commercial and economic purpose, which is supported by the right resources.

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