Captives should be prepared to commit more capital to their reserves under Solvency II: A.M. Best

Regulatory requirements for captives located in the European Union are certain to increase dramatically – as much as three- to fourfold – under Solvency II, warns A.M. Best.
In its report, Solvency II to Transform the EU Captive Industry, A.M. Best notes many captive owners will have to commit more capital to their captives under Solvency II.
For captives writing business inside the E.U. but domiciled elsewhere, lack of regulatory equivalence for these companies’ home regimes will probably mean greater regulatory scrutiny of reinsurance transactions and requests to post collateral.
Even for captives that already post collateral with fronting companies, the cost of the transaction is likely to increase, the report says.
The captive sector has been rallying for blanket proportionality – simplification provisions designed for smaller insurers – to be applied to it, but it is unclear whether this will be the case, A.M. Best continues.
As a result, the ratings agency recommends that captives assume a worst-case scenario (no proportionality is granted) and try to mitigate Solvency II’s effects.
“A key step would be participation in the European Insurance and Occupational Pensions Authority’s quantitative impact studies and the parallel development of partial capital models that best reflect each captive’s risks,” the report says.