The subject on the minds of most owners of EU based captives is Solvency II now that we are in the run up to full implementation in less than nine months...
The subject on the minds of most owners of EU based captives is Solvency II now that we are in the run up to full implementation in less than nine months.
With a soft market backdrop, Solvency II may additionally challenge some of the benefits offered by captives and so when considering where to establish a captive, corporations that have historically considered various jurisdictions’ based on their regulatory regime, capital and fiscal requirements will need to factor in the additional requirements in place in an EU domicile under Solvency II. That said, when we look at the bigger picture, especially in view of the International Association of Insurance Supervisors (IAIS) Core Principles and those broader regulation changes on the global horizon, of which Solvency II forms a part, it is clear that a risk-based approach to capital with a more sophisticated but proportionate approach to governance and risk management is where insurance regulation is headed.
Ultimately, this can only be beneficial for the industry.
In light of this changing landscape, Aon has developed innovative approaches in order to assist our captive clients prepare for Solvency II implementation. The first solution for our Gibraltar-based captive clients was driven by a regulatory reporting deadline of 31 December 2014 for submission of completed Forward Looking Assessment of Own Risk (FLAOR) reports.
Part of our solution under Pillar I was to also tackle the Solvency II standard capital requirement formula calculation at the same time as the FLAOR, which required a large volume of input data and numerous individual calculations, some of which are iterative in nature. To help our clients calculate their Solvency II Pillar I requirements Aon has developed Astra, which is an Excel-based Solvency II standard formula tool. This is a simple, easy to use and cost effective solution to completing the standard formula calculation, which we were able to use to help our clients prepare and submit their FLAOR on time to the Gibraltar regulator, the Financial Services Commission (FSC).
The next challenge comes in the form of governance requirements under Pillar II as captives are also required to adopt a comprehensive and documented formal risk-based governance framework. Aon developed an integrated and online governance, risk management and compliance (GRC) system to help our clients address these requirements.
Our GRC platform provides consistency at all levels and avoids extensive documentation of policies and procedures. Furthermore, our GRC platform helps our clients avoid complex and uncontrollable implementation programmes, whilst maintaining a structured approach across all organisational levels with a fit for purpose cost efficient solution.
Finally, we have Pillar III, which will play a key role in the Solvency II regime by promoting market discipline and encouraging greater transparency between firms, the regulator and the public. The new reporting regime will consist of two types of report:
These new requirements constitute a significant change to the current reporting regime, both in terms of content and frequency. As such, Pillar III is potentially the most onerous of the three pillars with regard to the level of information required. Aon is developing a quantitative reporting tool designed to streamline the quarterly and annual reporting obligations under Pillar III. This software will link into various Aon systems including Astra and the GRC in order to further ease the reporting requirements our clients now face.
We expect that with the solutions we have and plan to put in place to meet the requirements of Solvency II in the EU and the IAIS Core Principles beyond the EU, our clients will continue to achieve the value a captive solution can bring. However, we are also mindful of how this evolving regulatory landscape may cause a reassessment of current and future captive arrangements.
One trend that is starting to emerge is the increased use of cells in protected cell companies (PCCs), both for new clients and some existing captive owners.
In the past some EU and non-EU parent companies formed direct writing captives to facilitate fronting their EU-based risks to their non-EU domiciled captive. Solvency II will impact this structure going forward as it is driving the need for large capital increases to cover both captives’ statutory requirements along with the duplicated administrative cost and time.
In these cases, a PCC alternative may help and an advantage for our clients is that Gibraltar is well placed to assist due to its PCC legislation. Aon is able to provide various solution options through Aon-owned White Rock Insurance (Gibraltar) PCC, (the oldest established PCC in the EU).
Another area that is getting increasing attention is mergers and acquisitions (M&A). Past M&A activity has left some global parent companies with multiple captives, current renewals are now falling into the new legislation and owners are realising the operating and capital inefficiencies that remain in their existing strategies. We are seeing an increased interest in Gibraltar as a location to facilitate the warehousing of these multiple captive reserves into cells and then reinsuring to the main risk taking captive. This allows the release of excess capital and the rationalisation of the number of standalone captives in the group.
As Solvency II has compelled organisations and their risk management departments to re-assess their captive strategies, it has also triggered entities to consider their retention strategies, and this is where Gibraltar’s regulatory environment, including PCC solutions, is a major differentiator.
As one of only two domiciles that can offer both EU solvency standards and PCC cell solutions, Gibraltar can offer companies with a lower premium spend that want some of the gains of risk retention management without the associated capital and management costs.
