The QIS5 Solvency II regulatory capital proposals may represent a particular capital and compliance burden for European captive insurers due to their unique status, according to Fitch Ratings.
The agency says that owners retaining captives in the EU will have to strengthen risk management and governance functions, and in some cases additional capital injections may be necessary.
As an alternative, Fitch says captives could be re-domiciled to a non-Solvency II jurisdiction and write EU-based business through a fronting entity. In this case the agency believes that obtaining a credit rating on the captive could lower the overall capital cost.
"According to Fitch's analysis, obtaining a credit rating on an off-shore captive could, under the standard model, significantly lower the counterparty risk capital requirements levied on the fronting entity under Solvency II, and thereby reduce the overall capital requirements on an off-shore structure," says Bjorn Norrman, associate director in Fitch's insurance team.
The attractiveness of EU captive centres could hinge on how proportionality is applied by individual regulators under Solvency II. Fitch expects the majority of EU-based captives to be viable, but predicts that smaller captives with limited financial strength and expertise may fail to cope with the new compliance requirements, resulting in a limited outflow of captive entities from the EU.
The report "EU Captive Market At Risk From Solvency II - Credit Ratings could Become Critical for Captives Domiciled Offshore" is available at www.fitchratings.com