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Captives and Solvency ii
 
Captive Insurance and Captive Reinsurance Companies after the
Solvency ii Directive -
from the Solvency ii Association
the largest Association of Solvency ii Professionals in the world

 A. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the taking-up and pursuit of the business of Insurance and Reinsurance
SOLVENCY II - Brussels, 10.7.2007
 
There is nothing about captive insurance or captive reinsurance companies
 
 
 
B. Amended Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the taking-up and pursuit of the business of Insurance and Reinsurance
(SOLVENCY II) (recast) - Brussels, 26.2.2008

 There is nothing about captive insurance or captive reinsurance companies
 
 
 
C. Amended proposal for a Directive of the European Parliament and of the Council
on the taking-up and pursuit of the business of Insurance and Reinsurance,
SOLVENCY II - Presidency compromise - Brussels, 24 November 2008
 
Captive insurance and captive reinsurance companies are defined, and we read about the first applications of the proportionality principle
 
(6b) When in this Directive reference is made to insurance or reinsurance undertakings, it should cover captive insurance and captive reinsurance undertakings, except where special provision is made for those undertakings.

(12a) In particular, the new solvency regime should take account of the specific nature of captive insurance and reinsurance undertakings.
 
As those undertakings only cover risks associated with the industrial or commercial group to which they belong, appropriate approaches should thus be provided in line with the principle of proportionality to reflect the nature, scale and complexity of their business.

(1bis) captive insurance undertaking means an insurance undertaking owned either by a financial undertaking other than an insurance or a reinsurance undertaking or a group of insurance or reinsurance undertakings (…), or by a non-financial undertaking, the purpose of which is to provide insurance cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which the captive insurance undertaking is a member

(3bis) captive reinsurance undertaking means a reinsurance undertaking owned either by a
financial undertaking other than an insurance or a reinsurance undertaking or a group of
insurance or reinsurance undertakings (…) or by a non-financial undertaking, the purpose
of which is to provide reinsurance cover exclusively for the risks of the undertaking or
undertakings to which it belongs or of an undertaking or undertakings of the group of
which the captive reinsurance undertaking is a member


Article 127
Calculation of the Minimum Capital Requirement

1. The Minimum Capital Requirement shall be calculated in accordance with the following
principles:

(a) it shall be calculated in a clear and simple manner, and in such a way as to ensure that the calculation can be audited

(b) the Minimum Capital Requirement shall correspond to an amount of eligible basic own funds below which policyholders and beneficiaries are exposed to an unacceptable level of risk if insurance and reinsurance undertakings were allowed to continue their operations

(c) the linear function referred to in paragraph 2 used to calculate the Minimum Capital Requirement shall be calibrated to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 85 (…)% over a one-year period

(d) it shall have an absolute floor of (...):

(i) 2.200.000 EUR for non-life insurance undertakings, including captive insurance undertakings, except in the case where all or some of the risks included in one of the classes 10 to 15 listed in point A of Annex 1 are covered, in which case it shall not be less than 3.200.000 EUR,

(ii) 3.200.000 EUR for life insurance undertakings, including captive insurance
undertakings

(iii) 3.200.000 EUR for reinsurance undertakings, except in the case of captive reinsurance undertakings, in which case the Minimum Capital Requirement shall not be less than a minimum of 1.000.000 EUR

(iv) the sum of the amounts set out in points (i) and (ii) for insurance undertakings as
referred to in Article 72(5).
 
 
 
 
 
D. European Parliament legislative resolution of 22 April 2009 on the amended proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance

Now we have more details about captives
 

(6b) References in this Directive to insurance or reinsurance undertakings should include captive insurance and captive reinsurance undertakings, except where specific provision is made for those undertakings

(14c) The new solvency regime should also take account of the specific nature of captive insurance and reinsurance undertakings.
 
As those undertakings only cover risks associated with the industrial or commercial group to which they belong, appropriate approaches should thus be provided in line with the principle of proportionality to reflect the nature, scale and complexity of their business.

Article 13

Definitions

For the purposes of this Directive, the following definitions shall apply:

(1a) captive insurance undertaking means an insurance undertaking owned either by a financial undertaking other than an insurance or a reinsurance undertaking or a group of insurance or reinsurance undertakings within the meaning of point (c) of Article 210(1), or by a non-financial undertaking, the purpose of which is to provide insurance cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which the captive insurance undertaking is a member;

(3a) captive reinsurance undertaking means a reinsurance undertaking owned either by a financial undertaking other than an insurance or a reinsurance undertaking or a group of insurance or reinsurance undertakings within the meaning of point (c) of Article 210(1) or by a non-financial undertaking, the purpose of which is to provide reinsurance cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which the captive reinsurance undertaking is a member;

Article 85
Implementing measures

The Commission shall adopt implementing measures laying down the following:

(a) actuarial and statistical methodologies to calculate the best estimate referred to in Article 76(2);

(b) the relevant risk-free interest rate term structure to be used to calculate the best estimate referred to in Article 76(2);

(c) the circumstances in which technical provisions shall be calculated as a whole, or as a sum of a best estimate and a risk margin, and the methods to be used in the case where technical provisions are calculated as a whole;

(d) the methods and assumptions to be used in the calculation of the risk margin including the determination of the amount of eligible own funds necessary to support the insurance and reinsurance obligations and the calibration of the Cost-of-Capital rate;

(e) the lines of business on the basis of which insurance and reinsurance obligations are to be segmented in order to calculate technical provisions;

(f) the standards to be met with respect to ensuring the appropriateness, completeness and accuracy of the data used in the calculation of technical provisions, and the specific circumstances in which it would be appropriate to use approximations, including case-by-case approaches, to calculate the best estimate;

(g) the methodologies to be used when calculating the counterparty default adjustment referred to in Article 80 designed to capture expected losses due to default of the counterparty;

(h) where necessary, simplified methods and techniques to calculate technical provisions, in order to ensure the actuarial and statistical methodologies referred to in points (a) and (d) are proportionate to the nature, scale and complexity of the risks supported by insurance and reinsurance undertakings including captive insurance and reinsurance undertakings.

Those measures designed to amend non-essential elements of this Directive, by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in of Article 304(3).

Article 109
Implementing measures

1. In order to ensure that the same treatment is applied to all insurance and reinsurance undertakings calculating the Solvency Capital Requirement on the basis of the standard formula, or to take account of market developments, the Commission shall adopt implementing measures laying down the following:
....

(j) the simplified calculations provided for specific sub-modules and risk modules, as well as the criteria that insurance and reinsurance undertakings, including captive insurance and reinsurance undertakings, shall be required to meet in order to be entitled to use each of these simplifications, as set out in Article 108;

2. The Commission may adopt implementing measures laying down quantitative limits and asset eligibility criteria in order to address risks which are not adequately covered by a sub-module. Such implementing measures shall apply to assets covering technical provisions, excluding assets held in respect of life insurance contracts where the investment risk is borne by the policyholders. Those measures shall be reviewed by the Commission in the light of developments in the standard formula and financial markets.

Those measures designed to amend non-essential elements of this Directive, by supplementing it shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).

Article 127
Calculation of the Minimum Capital Requirement

1. The Minimum Capital Requirement shall be calculated in accordance with the following principles:

(a) it shall be calculated in a clear and simple manner, and in such a way as to ensure that the calculation can be audited;

(b) it shall correspond to an amount of eligible basic own funds below which policyholders and beneficiaries are exposed to an unacceptable level of risk if insurance and reinsurance undertakings were allowed to continue their operations;

(c) the linear function referred to in paragraph 2 used to calculate the Minimum Capital Requirement shall be calibrated to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 85 % over a one-year period;

(d) it shall have an absolute floor of

(i) 2 200 000 EUR for non-life insurance undertakings, including captive insurance undertakings, except in the case where all or some of the risks included in one of the classes 10 to 15 listed in point A of Annex 1 are covered, in which case it shall not be less than 3 200 000 EUR,

(ii) 3 200 000 EUR for life insurance undertakings, including captive insurance undertakings,

(iii) 3 200 000 EUR for reinsurance undertakings, except in the case of captive reinsurance undertakings, in which case the Minimum Capital Requirement shall not be less than a minimum of 1 000 000 EUR,

(iv) the sum of the amounts set out in points (i) and (ii) for insurance undertakings as referred to in Article 72(5).
 
 
       

 
Course Title
Challenges and Opportunities for Captives after Solvency ii:
Equivalence and Compliance challenges for non- EU and EU captive insurance companies
(1 day)
 
Objectives:
The seminar has been designed to provide with the skills needed to understand the application on non-EU and EU captives of the European Union’s Solvency ii Directive.
 
Target Audience:
This course is intended for board members and senior executives involved in the decision making process and the management of captives.
 
It is highly recommended for risk and compliance, internal control and internal audit managers and officers.
 
This course is also highly recommended for captive managers, captive service providers and consultants.
 
About the Course
 
  • Introduction
  • Understanding the Solvency ii Directive
  • Who has to comply, who tries to be “equivalent” and why
 
  • Captive insurance and reinsurance undertakings after Solvency ii
  • Solvency ii: Not a captive-friendly framework, designed for large multi-line insurance groups
  • Smaller mono-line insurers and reinsurers after Solvency ii
  • What is new, what is different for captives outside the European Economic Area
  • What is new, what is different for captives of the European Economic Area
 
  • EU business of third-country domiciled captives
  • European captives
  • Ireland, Guernsey, Luxembourg and the Isle of Man and the rest of Europe
  • Captives based in Offshore Financial Centers, but owned by non-insurance undertakings based in Europe
  • Captive reinsurers owned by European insurance groups
 
  • Supervision of Groups
 
  • The Solvency Capital Requirement
  • Internal model, Standard formula, or Simplified method?
  • The choice of calculation method and the different Solvency Capital Requirement
  • Simplifications and special treatment
  • How to avoid higher capital requirements, by demonstrating that less capital would be adequate in relation to your exposure
 
  • Solvency II related challenges for captives:
  • A. Concentration of assets.
  • B. No diversified portfolio of investments
  • C. Only a few lines of business
  • D. High claims volatility
  • E. Statistically unreliable computations
  • F. Risks of catastrophe scenarios
 
  • Solvency II related advantages for captives:
  • A. The risk of being sued by the policyholder is low
  • B. The operational risk is low - few transactions, limited number of policies
  • C. Outsourced activities
 
  • Do you need an Internal Model? Why? When? At What Cost?
  • The proportionality principle of Solvency ii and what it means for captives
  • Pure/Single captives
  • Group captives
  • Rent-a-captives
  • Cell Captives
 
  • Board of Directors and Management
  • Need for more formal governance, systems and controls
  • Corporate governance rules
  • The responsibility of the Board of Directors for risk management,  internal control,  internal audit and actuarial functions
  • The role and responsibility of management
  • Increased focus on risk management
  • Increased disclosures requirements
  • Administrative costs
  • Additional services from auditors and actuaries
  • Captives with day-to-day management outsourced
  • Captive service providers and increased expenses
 
  • Tomorrow
  • The Level 2 - Technical measures
  • Solvency ii: A risk that can become an opportunity

 

 

Solvency Capital Requirement
According to the Solvency ii Directive, The Solvency Capital Requirement reflects a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due.
 www.solvency-capital-requirement.com

 Minimum Capital Requirement
According to the Solvency ii Directive, when the amount of eligible basic own funds falls below the Minimum Capital Requirement, the authorisation of insurance and reinsurance undertakings should be withdrawn, if those undertakings are unable to re-establish the amount of eligible basic own funds at the level of the Minimum Capital Requirement within a short period of time.
 www.minimum-capital-requirement.com

 

Solvency ii Training

Certification:
Certified Solvency ii Professional (CSiiP)

Certified Training Course:
Certified Solvency ii Professional (CSiiP): Preparing for the Solvency ii Directive of the EU - Prep Course (3 days)

 

To learn more:
http://www.solvency-ii-association.com/Certified_Solvency_ii_Training.htm



Certification:
Certified Solvency ii Equivalence Professional (CSiiEP)

Certified Training Course:
Certified Solvency ii Equivalence Professional (CSiiEP): Preparing for Equivalence with the Solvency ii Directive of the EU - Prep Course (3 days)

 

To learn more:
http://www.solvency-ii-association.com/Certified_Solvency_ii_Training.htm



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For Further Information or to Register for one of our Solvency II Training courses contact:

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Tel:  +44 (0) 207 060 3312
Fax: +44 (0) 207 681 3317
Email: info@solvencyiitraining.eu
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