Solvency II regulations causing dilemma for offshore captive insurance sector

The Solvency II regulations have generated a great deal of controversy in the insurance industry, with many commentators describing the rules as excessive and disproportionate, particularly for the captive segment of the market.

Solvency II is the name given to new EU regulations for the insurance industry that will introduce enhanced capital and corporate governance requirements. Captive insurers, which largely provide self-insurance for their parent corporations, have argued in Brussels that they should not be subject to the same stringent regulations as commercial re/insurers covering third-party risks, but as yet there has been no movement in Europe beyond some comments that they may look at “segmenting” captive arrangements. 

In the meantime, the main offshore captive jurisdictions (Bermuda, Guernsey and Cayman) have had to decide whether to try to achieve “equivalence” for the purposes of Solvency II, or choose to plough their own furrow.

In a time when many offshore centres are offering packages of legislation and tax arrangements which look increasingly homogeneous, it seems that the captive insurance market is one where there are some marked divergences of approach appearing. In particular, Bermuda has chosen to go down the equivalency route, whilst Guernsey and Cayman, on the other hand, have chosen not to.

Bermuda believes that its strategy will bolster the country's status of having a credible regulatory environment and allow European insurers to carry on with their operations in Bermuda. The thought process is that if Bermuda doesn't gain equivalence, European insurers may not be able to count the full value of their Bermudan insurance and reinsurance contracts towards their capital, which could potentially discourage them from doing business in Bermuda.

Guernsey and Cayman, on the other hand, believe that the Solvency II rules are so unpopular that their decision not to apply for third-party country equivalence will have a positive impact on their  reputations as captive insurance destinations.  And, although it is very early days, there are some early signs that they might be right. Paul Sykes, of Aon Insurance Managers last week told a London audience at a ‘Master Class’ session that the number of insurance licences issued recently in Guernsey continues to rise as the implications of compliance with Solvency II are better understood by captive managers and owners. He commented:

“While the capital requirements of Solvency II may be appropriate for commercial insurers who are dealing with the general public, many captive managers and owners believe that the regulatory standards of the International Association of Insurance Supervisors will be sufficient for most traditional captives.”

The dynamics may change again before the January 2013 implementation of the Solvency II deadline, but in the meantime a great deal is at stake for all the jurisdictions concerned.