Solvency II Review improves proportionality for captive (re)insurance companies, with revised framework expected by the end of 2024, according to latest FERMA Policy Note

Published on October 18, 2024

New proportionality framework introduces category of “small and non-complex undertakings” (SNCUs), with majority of EU-domiciled captives expected to meet the SNCU criteria.

Brussels, 17 October 2024 – FERMA has issued its third EU Policy Note, which details the European Commission’s review of the Solvency II Directive, providing guidance on how improvements to the Principle of Proportionality (PoP) are expected to benefit parents of captive (re)insurance companies domiciled in EU member states.

Download it here

Following political agreement on revisions to the Directive reached in December 2023, FERMA learned that the consolidated and updated text should be published in the Official Journal of the European Union by the end of 2024. EU Member States will have 18 months to thereafter transpose the changes into national law.

Among the key aims of the EC review was the need to address any unintended consequences of the original directive, such as overly burdensome requirements on smaller and non-complex insurers. Over time, experience has showed that the PoP with respect to prudential rules governing (re)insurance business in the EU has been applied inconsistently and insufficiently.

The Policy Note foregrounds the implementation of two key features under Article 29(a) intended to address the objective of improved proportionality covered in the review:

  1. The introduction of “small and non-complex undertakings” (SNCUs), which FERMA believes will bring more consistency across EU Member States and more predictability, as the revised text sets out clear criteria any (re)insurance undertaking should meet in order to be classified as SNCU by their national regulator or national competent authority (NCA).
  2. A shift in the burden of proof, with NCAs required to provide explanations and details to insurance undertakings if the authority wishes to challenge the SNCU classification.

It is believed that the majority of captives domiciled in EU Member States should meet the SNCU criteria in Article 29a or via the captive-specific derogation. As such, captives are expected to benefit from greater proportionality under the revised Solvency II Directive.

Captive companies classified as SNCU should benefit from proportionality measures on reporting, disclosure, governance, revision of written policies, calculation of technical provisions, the own risk and solvency assessment (ORSA) and the liquidity risk management plan.

“Proportionality is a significant development for the European captive (re)insurance market and has been a critical objective for FERMA in recent years,” says Laurent Nihoul, Board Member and Chair of the Captive Committee, FERMA. “Holding captives to the same regulatory requirements as large, diversified insurers places excessive administrative burdens and costs on such entities, reducing their overall effectiveness and efficiency.”

The thresholds and criteria appliable to the activities of undertakings classified as SNCU under Article 29(a) and that are relevant to captives fall under three principal areas: scale, nature and risk profile.

The Policy Note also highlights a further derogation available to captives, where they can also be classified as SNCU even if non-compliant with the above criteria, provided they comply with both of the following:

a. all insured persons and beneficiaries are any of the following:

  • legal entities of the group of which the captive insurance undertaking or captive reinsurance undertaking is part
  • natural persons eligible to be covered under that group’s insurance policies, provided that the business covering those natural persons remains below 5% of technical provisions

b. the insurance obligations and the insurance contracts underlying the reinsurance obligations of the captive insurance undertaking or captive reinsurance undertaking do not consist of any compulsory third-party liability insurance.

“Captives are an essential part of a vibrant and competitive EU insurance market,” says Typhaine Beaupérin, CEO, FERMA, “enabling parent companies/groups to have greater control over risk management strategies and insurance coverage. These capabilities are particularly important at a time when the risk landscape is evolving rapidly with new risks emerging, including those related to the Net Zero transition.”

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