The Federation of European Risk Management Associations (FERMA) is hopeful there will be more regulatory consistency between EU captive domiciles once Solvency II reform is implemented, but questions remain over implementation.
Captive Intelligence reported in April the European Parliament had passed proposed Solvency II reforms that introduced regulatory concessions for “small and non-complex undertakings”, which the majority of captive (re)insurers are expected to fall into.
Speaking on the latest episode of the Global Captive Podcast, FERMA’s head of EU affairs Charles Low and Laurent Nihoul, head of the Federation’s captive committee, explained the background and journey of the reforms and their hopes for its tangible benefits.
Low explained that while the original Solvency II regulation “explicitly defined” captives in Article 13 of the Directive, and instructed national supervisors to apply requirements according to the nature, size, and complexity of the regulated entity, this was not always the case.
“What was experienced by FERMA, its members and others, was that in some cases, captives were treated in the same way, prudentially, as basically large insurers,” he said.
“And that’s stretching it out to the point that captives, conceptually, were kind of unfamiliar territory to many regulators.”
Nihoul explained that there have been inconsistencies between even established captive domiciles as to how Solvency II had been applied.
“What we have experienced since the introduction of Solvency II is that proportionality was not really applied in a consistent way, depending on the country,” Nihoul said.
“In Ireland, for instance, with the Own Risk Solvency Assessment (ORSA) or in Luxembourg for quarterly reporting, the criteria were not really consistent. It was really left to the member states to define what was really proportionality and how it should be applied.”
Nihoul added that he hoped that the introduction of “small and non-complex undertakings” would bring “much more clarity and consistency across member states”.
“Now we have a clear principle, which we believe will bring more consistency across the different countries in Europe and more predictability,” he added.
“The predictability principle is really crucial because we have now in the new text a list of clear criteria, with which any insurance or reinsurance company should comply with to be considered as a small and non-complex entity.
“Even more importantly, there is now a derogation for captives because the texts say that captive companies can be classified as small and non-complex entities even though they do not comply with all these criteria, provided that they comply with a couple of other criteria.”
With the Solvency II reforms passed, the next big question and focus for the European market is implementation.
It is anticipated that supervisory authorities will begin implementing the changes from 2026, but member states will need guidance from EIOPA on the next steps.
“All of the various 27 member states in the EU are then charged with putting that EU directive into their own national law and then determining on how they will implement it within the constructs of their national legal systems,” Low said.
“There invariably will probably be some questions, some patches of uncertainty and so forth. So the implementation part is going to be a big open question.”
Listen to the full podcast discussion with FERMA’s Charles Low and Laurent Nihoul on GCP #107 here, or on any podcast platform. Just search for ‘Global Captive Podcast’.