Cayman ‘wary’ of Solvency II

The head of CIMA Insurance Division, Gordon Rowell, said the Cayman Islands will not commit to Solvency II until aspects of the European Insurance framework have become clearer and are more widely used internationally.

Speaking at the Cayman Captives Forum at the Ritz Carlton last week, Mr. Rowell said the Cayman Insurance Law must remain relevant in the current economic climate. The new law seeks to do this from both a business development and an international compliance standpoint. At the same time the Insurance Law has to recognise and reflect the significant differences between markets and the risks in these markets, he said.

“Captive insurers arguably do not need a Solvency II approach, but open market operators that deal with unsophisticated third-party buyers probably do need a high level of oversight,” he noted.

“And the key here is to have a Law that meets both market needs.”

Solvency II is a review of the EU insurance framework seeking to improve the financial soundness of insurers and reinsurers. The EU aims to extend the framework internationally.

While acknowledging that Solvency II is generally a good concept, Mr. Rowell questioned the extension of the framework to captives.

“In the Cayman Islands we feel wary to commit to Solvency II because there are too many unknown factors at the moment, particularly on the captive regulation side.”

Even the EU recognises the present gaps in Solvency II, he said. One of the problems with Solvency II, he noted, is that it will most certainly increase the capital requirements for captives and its adoption would therefore be more costly.

“This is hardly comforting in a world of economic instability.”

Trepidation for captives

“If you look at the assessment criteria under Solvency II there should be much trepidation for captive owners, insurers and regulators alike. There are fundamental problems that need addressing,” Mr. Rowell added.

Emphasising that he was not speaking out against Solvency II generally, Mr. Rowell noted that “it is great piece of legislation for the commercial market and reinsurers”, but he explained, “captives are generally low risk, they are small in size, nature and complexity.”

The regulation of captives under the proposed insurance regime would not be proportional. He highlighted in particular the cost for captive owners to develop a model to calculate the allocation of capital. “The model alone is very expensive for a typical captive owner to build and somewhat fraught.”

The approach was also not transparent, Mr. Rowell added. “The model itself has a number of calibration factors which are not always crystal clear and they are skewed against captive owners,“ he said, mentioning concentration risk and the combined ratio use as examples.

“Certainly we will not be committing to any attributes of Solvency II until we have a better understanding of the framework and also until it becomes a widely used international requirement,” he concluded.

Delegates at the Cayman Captive Conference, organised and hosted by IMAC, the organisation of Insurance Managers of Cayman, were reminded by Deputy Premier Juliana O’Connor Connolly that Cayman remains the world’s largest domicile for hedge funds, healthcare insurance captives and cat bonds. Continuing its efforts to stimulate the economy, the Cayman government recently passed the Insurance Law 2010, she said.

“This piece of modernised legislation paves the way for a local financial services industry to build on the islands’ existing reputation as a dynamic place to do business and it is indeed the collaboration of public and private sector efforts to improve the regulation of the insurance business,” she noted.

The main aspect of the new Law provides two new categories of insurance licenses, for special purpose vehicles and reinsurers, as well as whistleblower provisions, domestic policy holder protection and increased penalties and powers by the Cayman Islands Monetary Authority.

In addition to Solvency II and the modernised Cayman Islands Insurance Law, US healthcare reform was another important topic at the three-day event that caters to Cayman’s healthcare dominated captive market.

Other issues were the adoption of risk management strategies and practical questions addressing the operation of captives in three afternoon streams and training sessions.

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