Solvency II Review Enhances Proportionality for Captive Insurers

The European Commission's review of the Solvency II Directive is set to improve proportionality for captive (re)insurance companies, with a revised framework expected by the end of 2024, according to the latest Federation of European Risk Management Associations (FERMA) European Union (EU) Policy Note. A key feature of the new framework is the introduction of "small and non-complex undertakings" (SNCUs), which is expected to apply to the majority of EU-domiciled captives.

FERMA's Policy Note outlines how the updated directive, following a political agreement reached in December 2023, will be published in the Official Journal of the European Union by the end of 2024. Member states will have 18 months to incorporate the changes into national law. The review aims to address the unintended consequences of the original directive, which imposed overly burdensome requirements on smaller insurers.

"The new category of SNCUs will bring more consistency across EU Member States and greater predictability, as the revised text sets out clear criteria for any (re)insurance undertaking to be classified as an SNCU," the Policy Note states. It also details a shift in the burden of proof, requiring national regulators to provide explanations if they wish to challenge an SNCU classification.

FERMA expects most captive insurance companies in the European Union to meet the SNCU criteria or qualify through a captive-specific exception. Captive insurers classified as SNCUs will benefit from proportionality measures in several areas, including reporting, governance, and risk assessments.

"Proportionality is a significant development for the European captive (re)insurance market and has been a critical objective for FERMA in recent years," said Laurent Nihoul, board member and chair of the Captive Committee at 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 Policy Note also highlights an additional exception available to captives, allowing classification as SNCUs even if they do not meet all the specific criteria, provided they comply with certain conditions.

"Captives are an essential part of a vibrant and competitive EU insurance market," said Typhaine Beaupérin, CEO of FERMA. "They enable parent companies and groups to have greater control over risk management strategies and insurance coverage, which is especially important as new risks emerge, including those related to the Net Zero transition."