A key question remains outstanding about the role of insurance supervisors and their responsibility for implementing the proportionality principle in the Solvency II framework. Proportionality is a welcome principle of Solvency II and as the smallest insurance entities, captives are entitled to benefit from it.
Because of their “specific nature”, the Directive explicitly asks that rules for captives should “reflect the nature, scale and complexity of their business”. In practice it means, for instance, simplified calculations for capital requirements.
We are starting to see that the proportionality principle is currently applied differently from country to country. On 27 March 2018, during a public hearing on the 2018 review of Solvency II implementing measures, some participants mentioned a lack of EU-level guidelines on how to clearly implement proportionality. A similar conclusion was reached among risk experts within the dedicated FERMA working group, with some of them already in talks with their regulators about their proportionate approach regarding captives. Such guidelines should eventually help to indicate quickly if a company is eligible or not for proportionality treatment.
With a privileged position and access to all EU local insurance supervisors, the European insurance supervisory agency EIOPA has a key role to play in monitoring how local regulators have translated and defined what is a captive and how the principle of proportionality should be applied.
FERMA has a strong interest in being the liaison between EIOPA and the captive users among our member associations that are providing us with their feedback. Our membership in the EIOPA stakeholder group is the opportunity to convey these feedbacks and help EIOPA ensure a supervisory convergence.
In July 2016, the European Commission asked EIOPA to provide technical advice on the implementation of Solvency II. It addressed the issue of proportionality with the review of the simplified calculation of the Solvency Capital Requirement (SCR), which is an overarching principle of Solvency II. In total, EIOPA provided 600 pages of advice, a paradox when speaking about proportionality.
In its first document issued in October 2017, EIOPA indicated that national supervisory authorities are reporting that captives are using simplified calculations for the following risks: interest rate risk (15 captives); market risk concentration (10 captives); spread risk on bonds and loans (8 captives); premium and reserve risk (35 captives). EIOPA’s second set of advice was released on 28 February 2018, and the review of the methodology for calculating the Solvency Capital Requirement with the standard formula should be concluded before December 2018.
Pillar1 of Solvency II, dedicated to quantitative and capital requirements, limits flexibility for supervisors to apply proportionality since it is mostly rule-based, i.e. embedded in the legal texts themselves. By contrast, pillar 2 about governance and risk management is more principles-based, with a greater role for the supervisors and for EIOPA to foster supervisory convergence.
There is an acknowledgement that EIOPA’s advice is a major asset to advance the topic of proportionality. Proposals for the future could include moves towards more proportionality but with tougher capital requirements.
There could be more guidance on how to apply proportionality in practice, or more flexibility for supervisors to decide how to apply proportionality on a case by case basis. Pillar 3 about reporting will be subject to review in 2020.