European Captive Insurance and Reinsurance Owners` Association
It goes without saying that the introduction of Solvency II has brought with it great challenges for insurers. But ECIROA chief Günter Dröse feels the way forward is to work together, and keep things simple..
In your opinion, how ready are Europe’s captive insurers for the arrival of Solvency II?
As far as I understand, all of Europe’s insurers are currently preparing themselves for implementation in January 2016. The bigger captive managers such as Aon, Marsh and Willis all have structures in place and an idea of how to fulfil all of the requirements. On the other hand, the smaller, self-managed entities from many countries will have asked their particular regulators’ advice on how to manage certain aspects of the requirements.
The key factor is that each country will have its own approach to how they deal with the Solvency II requirements themselves. Either way, all of them are 100 percent aware of it and no one is in danger of being caught sleeping. It is important to remember that implementation is a flowing situation. Some countries demand more from their insurance companies, including captives, and others demand less.
What are the main advantages and disadvantages for insurers that are preparing to comply with Solvency II?
There are no real difficulties to speak of. There might be different adjustment needs in different countries. We have data on 130 captives in Europe, collected parallel to the quantitative impact study (known as QIS 5) exercise based on the expected Solvency II rules, many of which have different strategies.
In Luxembourg, for example, it is a must to establish high reserves, which means there is always enough liquidity to pay out. In Ireland however, an insurer cannot immediately pay out of its own assets and so has to get the money paid by someone who has issued a letter of credit and pay them back via its parent company.
So we see, even under the existing framework, that different countries have had different ways of dealing with the requirements under Solvency I. Despite this, I would not see a problem for either of the countries I mentioned in adjusting to Solvency II. Any problem a domicile had would have most likely been present prior to Solvency II. A well-managed captive will easily survive.
In terms of advantages, there might be a flight into diversity. In other words, companies may begin trying to write more business on lines of insurance besides the traditional property and casualty, to get additional benefits.
This reduces the need for capital, as the diverse lines are more balanced. I would like to think that the future for European captives is bright and only those who are either very small or do not have the proper loss ratio will struggle.
How much demand do you think there will be from the captive industry for the assistance of service providers such as BNP Paribas to aid with reporting?
In the market there are a lot of companies offering to support captives in establishing a proper Solvency II structure. In truth, I don’t know how much they will be used by captives following implementation. The majority of self-managed captives will seek out an actuary or an external auditor as they need them.
With Pillar III requirements, they may need a proper reporting tool, but in each and every country captives are only a small piece of the cake. Service providers offer this kind of assistance to all mid-sized and smaller insurers that do not have internal services and may need some help. I think most are too expensive and it could be reasonable, over time, to do these things by yourself.
How is Solvency II expected to affect other, non-European, domiciles in terms of gaining equivalence?
The International Association of Insurance Supervisors (IAIS) is currently developing standard capital requirements by itself and has rolled out a proposal for cross-border groups and local supervisors to comment on. The European Insurance and Occupational Pensions Authority (EIOPA) wanted to influence this as much as possible, as it believes Solvency II is the one and only such set of requirements.
The relationship between Europe and the rest of the world is difficult. For the time being, I wouldn’t comment on other domiciles. EIOPA’s phrasing excludes captives in its opinions of other countries such as Bermuda, so does that mean the rules are not equivalent? EIOPA does not specifically say that, it just carves out any mention altogether. The problem is whether insurance and reinsurance contracts between domiciles such as Bermuda and companies in Europe will be affected.
Another strange point is that EIOPA does not fight with the National Association of Insurance Commissioners in the US about what is the right or wrong approach. It is flexible to the point where it has a problem. So it allows itself judgement on Japan, Switzerland or Bermuda, but not on the US.
Are there any problems with Solvency II that are still in need of ironing out prior to implementation?
It is very important that Solvency II looks as if it will be more challenging for insurers than capital requirements are for banks or financial institutions. Although insurers are unlikely to see an additional burden, it still seems unfair that financial institutions do not have to underpin each and every risk with capital.
The banks are happy so they will not discuss it. In the insurance market, however, each and every type of risk has to be underpinned and so the burden is higher. I believe there is a need to review these requirements, less the insurance market become strangled.
It is a matter of fact that today, and in the near future, Pillar III will require insurers to publish all of their data, but this will not lead to any additional transparency.
It will make rating agencies, accountants, analysts, consumers and whoever else is in charge of assessment more puzzled than ever before. Data in Pillar III is often contradictory to Pillar I or the company’s balance sheet.
In essence, five different sets of data are presented and it is difficult to understand if they are consistent. Worse still, there is nobody in the market who knows why this is. This is the opposite of transparency, and has been implemented not for consumer protection but for their own protection if an insurer fails.
It is a very peculiar situation, but the way forward is to work together, not to complicate things for each other, and hopefully it will work to the benefit of all.
