In its latest note on captives, Fitch said that it expects proportionality to be applied by individual regulators in a manner that makes the majority of EU-based captives 'viable' under Solvency II.

But the agency predicts that, in certain cases, in particular for small captives with limited financial strength and expertise, the new compliance requirements 'are likely' to prove too burdensome. This could result in a 'limited outflow' of captive entities from the EU, predicts Fitch.

"Owners that retain captives in the EU will have to strengthen risk management and governance functions, and in some cases additional capital injections may be necessary," said the rating agency.

It added that, as an alternative, captives could be re-domiciled to a non-Solvency II jurisdiction, such as Guernsey, and write EU-based business through a fronting entity. In this case, Fitch believes that a credit rating on the captive could lower the overall capital cost for the owner.

"According to Fitch's analysis, obtaining a credit rating on an offshore captive could, under the standard model, significantly lower the counterparty risk capital requirements levied on the fronting entity under Solvency II, and thereby reduce the overall capital requirements on an offshore structure," said Bjorn Norrman, Associate Director in Fitch's insurance team.

Meanwhile, the Guernsey Financial Services Commission revealed this week that the number of insurance licenses issued by the island last year increased by 53%, from 47 international insurers approved during 2010, to 72 international insurers licensed during 2011.

According to the Commission, the net total number of international insurance entities licensed in Guernsey increased by 12, from 675 at the end of 2010 to 687 at the close of 2011. These comprised 68 protected cell captives (PCC), 267 PCC cells, 5 Incorporated Cell Companies (ICC), 15 ICC cells and 77 life policy cells.

The licenses issued in Guernsey in 2011 comprised six insurance companies, 12 PCCs, 40 PCC cells, one ICC, seven ICC cells and six life policy cells.

Martin Le Pelley, Chairman of the Guernsey International Insurance Association (GIIA), said: "It is extremely encouraging for Guernsey's insurance market that we are seeing such positive trends at a time when an economic and political storm is engulfing the rest of Europe.

"As a result of the decision not to seek equivalence with the proposed European regulatory regime, Solvency II, our internationally compliant insurance regulations continue to provide the local industry and also our current and potential clients with certainty and clarity regarding the regulation of insurance business in Guernsey. This has, no doubt, contributed to the growth of the market during 2011."

The Commission said that 63% of licenses issued in 2011 were to entities with parents in the UK but there was also new business from other parts of Europe, North America, the Caribbean and Asia.

For 2010, the Guernsey international insurance industry had gross assets of £21.4bn, a net worth of £8.5bn and premiums written totalling £4.1bn.

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