Embracing Change: The Regulatory Evolution of Captive Insurance Companies

Abstract

The captive concept—in its most basic form—is that of forming an insurance company to insure the risks of its owners. A captive insurer’s owner and the ultimate insureds are, in most cases, one and the same. When the insured is the owner of the insurance company, policyholder protection, as a key principle of insurance regulation, may take a different emphasis.

The Solvency II framework is structured through three separate but complementary pillars which are applicable to captives in like manner as they are applicable to insurance and reinsurance undertakings. The principle of proportionality which is threaded through the Solvency II Directive is indeed identified as a fundamental concept applicable also to captives.

The three broad objectives of the Solvency II Regime—to improve policyholder protection, to improve international competitiveness of EU insurers and to deepen the integration of the EU insurance market—have been argued to have limited applicability to captives.

This notwithstanding, there is a growing appreciation of the opportunities afforded to captives under Solvency II through better governance, added value to the risk management process as well as increased intellectual capital.

Against a backdrop of evolving insurance regulation, captives have maintained a steady growth and remain key as part of the risk management programme of their owners. As captives adjust, they innovate and look for opportunity in change. On a going forward basis, coping with the challenges associated with a change in regulatory culture, mind-set and skill set have been identified as the main lessons being learnt.