Tuesday, 8 May 2012
The big question for domiciles–in or out?
Solvency II raises some big questions for captive owners and managers but also for the domiciles themselves. Tony Dowding asked what the domiciles themselves are doing to respond to the challenges posed by the new rulebook.
Rock of Gibraltar
There are three distinct groups of captive domiciles: those in the EU that directly face Solvency II, those outside the EU that seek equivalence (currently Bermuda and Switzerland), and those outside the EU that do not seek equivalence.
The EU group of captive locations includes Dublin, Luxembourg, Gibraltar and Malta, as well as Denmark, the Netherlands, Sweden and Cyprus.
Outside of the EU, there is Guernsey, the Isle of Man, Jersey, Liechtenstein and Switzerland, and further afield, of course, Bermuda and Cayman.
Derren Vincent, Executive Director, Willis Management (Gibraltar) Ltd, said that Europe tends to have the larger well capitalised captives because of the current Minimum Guarantee Fund capital requirements, as well as the underlying reasons for locating the captive originally in Europe, such as the associated benefits of direct writing a large EU exposure.
“As such the increased capital requirements, which are already well understood through having a QIS5, are expected to be surmountable through an existing healthy solvency surplus and/or combined with some programme redesign to mitigate the catastrophe charges in particular,” he explained.
The largest EU captive domicile is Luxembourg which only licences captive reinsurance companies. These are required to set up a loss equalisation reserve which has long been seen as a major attraction because they are tax efficient.
The Commissariat aux Assurances, the regulator in Luxembourg, said that a major advantage of the domicile is that “the equalisation reserves will be fully recognised as the best quality of capital (Tier 1) under the new Solvency regime, since this reserve is fully loss absorbent.”
The domicile that has taken most advantage of the EU single market and ‘passporting’ opportunities is Ireland, or more specifically, Dublin.
There are more direct writing captives here than anywhere else in the EU, and so the arrival of Solvency II is a major issue.
Both the Central Bank of Ireland and the insurance industry are working towards an implementation date of 1 January, 2014, according to Ian Clancy, Managing Director, Marsh Management Services, Dublin.
He said that much of the compliance-related work for captives in recent months has been preparatory work for Solvency II. “To date this has covered capital adequacy and corporate governance requirements in line with the EIOPA guidelines and pronouncements. Further work will be needed in the area of disclosure and transparency,” he said.
Gibraltar is another domicile that hopes to exploit direct writing into the EU.
Michael Oliver, Head of Insurance Supervision, Financial Services Commission (FSC), Gibraltar, said the FSC is currently reviewing draft implementing measures to ensure that its legislation and regulations meet requirements by the due date, but added that the FSC is not yet in a position to provide any specific guidance to captive insurers.
“In Gibraltar the FSC and the industry have also been focused on risk management, corporate governance and disclosure elements of Solvency II,” he explained. “The existing regulatory and supervisory regime in Gibraltar already pays close attention to risk management and corporate governance issues, so the FSC and insurers are already well versed in this topic.”
And the latest captive domicile in the EU is Malta. Professor Joe Bannister, Chairman and President, Malta Financial Services Authority, said that Malta is making good progress in its preparations for Solvency II. “While drafting of the relevant legislation proceeds, the regulators are in active discussions with the industry regarding the follow up to QIS5 and other preparations, and three Guidance Papers have been issued by the Authority on the transposition and implementation of Solvency II. Training and other technical seminars have also become a regular feature of the implementation process,” he said.
Non-EU captive domiciles are facing a growing dilemma, said Shaun Brook, Managing Director, Europe & Middle East, Kane.
This is because they have the option to apply for third-country equivalence or they can take the decision not to follow the new rules. He pointed out that Guernsey, Cayman and Qatar, among others, have made statements that they do not intend to seek equivalence with Solvency II and he said that anecdotal evidence suggests they have seen an increase in enquiries about captive formations.
“While Bermuda is seeking equivalence, it has been at pains to emphasise that the new rules will not apply to captives. Only class 3 and 4 insurers will fall within the scope of the solvency regulation, while class 1 and 2 insurers—the category captives generally fall under—should not be affected,” he added.
Guernsey has been unequivocal in its determination not to seek equivalence with Solvency II.
The Guernsey Financial Services Commission (GFSC) believes its current regulations are appropriate and robust, and meet international standards, while Solvency II is primarily aimed at reinsurance and is disproportionate for captives.
And Guernsey believes that its position will persuade captives to relocate out of the EU to the island.
Martin Le Pelley, Chairman of the Guernsey International Insurance Association, said: “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 Isle of Man, which has taken a similar position on equivalence, has, according to Brian Donegan, Department of Economic Development, Isle of Man Government, “seen a large number of new enquiries from the owners of Bermuda-based captives and EU-domiciled captives, that are seeking a domicile which has regulations which are proportional to their business while complying with international standards. A number of these companies have formed incubator vehicles in the Isle of Man to support their risk management and disaster recovery policies.”
Although the Isle of Man has said that it does not seek equivalence, Mr Donegan said that the offer of a transitional regime for third country equivalence under Solvency II is of potential interest to the Island’s large life insurance sector.
“However, there are some concerns that an equivalent Solvency II framework may not be proportionate to captive business. Therefore, if the Island was to be part of the transitional regime, we would wish to explore how our regulatory framework could be maintained in a way that suits the risk profile of our captive market,” he explained.
Bermuda has attempted to do just that. It has sought ‘segmented equivalence’ in which it aims for equivalence for its commercial reinsurers, but without such a strict regime for its captive sector, and this approach appears to have been looked on favourably by the European Commission. Cayman has not sought equivalence and, like Guernsey and the Isle of Man, is expecting to see growth as a result.
For some captive domiciles, Solvency II has become a battleground—in or out, equivalence or not, transitional or full implementation. There may be big changes ahead, or there may be a proportional response that changes relatively little.
Currently, everyone is waiting for the EU to issue some detailed guidelines, though no one is holding their breath. When it comes to Solvency II, some clarity would make a nice change.