EUROPE – The second pillar of Solvency II legislation will entail more than just additional capital requirements and could have "serious" implications for captive managers writing employee-benefit risks, Towers Watson has warned.
According to the consultancy, even though captive managers currently do not tend to finance employee-benefit risks, "this is changing fast".
It advised captive managers to start focusing more on the governance and risk management aspects of Solvency II.
Towers Watson argued that captive managers were directly affected by the implications of the new directive and would, sooner or later, have to take notice of the requirements set under its second pillar, which require the captive board to demonstrate robust governance and risk management.
Mark Cook, director at Towers Watson, said: "Until now, the greatest concern for captive managers about Solvency II has been the solvency capital requirement and the implications of the solvency margin standard formula for the balance between risk retention, capital and reinsurance.
"Now, captive owners realise improved governance and control also matter, especially when those captives are writing employee benefit risks."
Cook added that governance and risk management requirements could have a serious effect on captives' operations.
However, he said he did not believe EU-based captives would begin relocating to alternative domiciles with less regulation.
"The fact regulators are now more focused on avoiding regulatory shopping means there will be more uniformity," he said.
"Although there are additional requirements coming into play that weren't around a few years back, the improved framework should enhance the long-term success of captive programmes if well thought through."
Towers Watson conceded that, even though Solvency II governance requirements will create more work for captive management, many captives that write employee benefits risks already have governance frameworks in place.
According to Cook, many captive managers have a captive board sub-committee with specialist employee benefits knowledge.
This committee will focus on employee benefit risks and advise on a variety of topics such as underwriting, pricing, reporting and provider service levels, meaning Solvency II's second pillar will only be an "extension" or "formalisation" of current best practice.