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    Solvency II - ECIROA raises concerns over Solvency II for captives

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    The European Captive Insurance and Reinsurance Owners’ Association (ECIROA) has written to the Internal Market and Services Directorate General of the European Commission, and the European Insurance and Occupation Pensions Authority (EIOPA) (a copy of the letter has been published on ECIROA’s website here).

    In its letter, ECIROA referred to "the number of outstanding issues that we look forward to resolving with the Commission and EIOPA". In particular, the letter stated that it had some concerns over article 78 of SCRSC1; "[the article] narrows the definition of captives by placing restrictions on the types of captives that will be allowed to use the captive simplifications to calculate the solvency capital requirement". ECIROA argued that "this operates against the principle of proportionality for captive insurance and reinsurance undertakings as called for in the Solvency II Directive".

    Under article 78, captive insurance and reinsurance undertakings will be able to take advantage of the simplified calculations where such calculations are considered as proportionate to the nature, scale and complexity of the risks they face, but only where the captive undertaking meets certain requirements. For example, in relation to the insurance obligations of the captive insurance undertaking, all insured persons and beneficiaries must be legal entities of the group of which the captive insurance or reinsurance undertaking is part of, and in relation to the reinsurance obligations of the captive insurance or reinsurance undertaking, all insured persons and beneficiaries of the insurance contract underlying the reinsurance obligations must be legal entities of the group of which the captive insurance or reinsurance undertaking is part of.

    ECIROA noted that these two limitations alone are "so strict that they would effectively rule out at least 8 out of 10 captives from using the simplifications for captives". This is because major corporations tend to have active mergers and acquisitions, and what may be a legal entity of a group today, might not be part of the group in 2 years’ time. On the other hand, insurance policies issued today cover all group affiliates and these entities remain covered under the group’s occurrence based Third Party Liability Insurance, even if such a legal entity is later sold (although the captive will not be insuring any new risks of the entity once it has been sold). If a captive (re)insurance undertaking was to fall outside of article 78 (which ECIROA estimates to be the case for around 80% of European based captives), it would effectively be treated as a standard commercial (re)insurance company, which, ECIROA argues, is not what Solvency II intended. Therefore, ECIROA has suggested an alternative article 78 which only excludes direct captive insurance undertakings which write compulsory third party liability insurance from taking advantage of the captive simplifications.

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