European Captives More Focused on Risk Mgmt., Investments: A.M. Best

August 14, 2015

A.M. Best has released a new study -“European Captives Increase Focus on Risk Management and Investments Ahead of Solvency II -” which concludes that “many European captives have embraced Solvency II’s increased regulatory requirements as an opportunity to focus more closely on risk management and refine their investment strategies.”

That’s quite a change. As the report points out: “Initially, it appeared that captive owners viewed the Solvency II requirements as an onerous burden due to the cost issues.” Best has now determined, however, that “its rated captives mostly view the higher costs from upgrading risk management and governance as offset by the benefits that a better understanding of their risk profile provides.”

In addition most “captives are not treating the regulations as merely a box-ticking exercise,” Best said. They are using “the information they have gathered to meet Solvency II’s qualitative and reporting requirements as an opportunity to also review their business models.”

As a result, Solvency II is now being viewed as a “positive development for captives, as stronger risk management capabilities will provide greater value to their parent companies. At the same time, parent companies have been optimizing other aspects of their captives’ operations in the light of Solvency II.”

Anthony Silverman, senior financial analyst, said: “A.M. Best has noted a pragmatic response to pressures arising from Solvency II. Parent companies have been reviewing the acceptance of new risks in existing captives to increase diversification under Solvency II. A captive that is able to accept different risks would ultimately be of increased importance to its parent.”

The report also looks at changes in the way captives’ invested assets are managed. Konstantin Langowski, financial analyst, added: “A.M. Best has already seen changes in terms of rated captives’ asset allocations ahead of the introduction of Solvency II. Increasing numbers of captives now outsource their investment management to third-party specialists in order to achieve better portfolio optimization. This is reflected in asset reallocations in order to achieve more diversification and by new exposure limits intended to reduce concentration and hence to lower capital requirements under the new regulatory regime.”

A.M. Best’s report also notes that, under Solvency II, “the credit risk charge is relatively high if an insurer cedes business to a low, or non-rated entity, and this might have an impact on fronting arrangements.”

Source: A.M. Best

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