Currently when Guernsey insurers, including captives, accept reinsurance from EU domiciled insurers, the EU insurer is normally able to take account of the ceded reinsurance in determining its own solvency capital requirements. Under the EU Solvency II Directive, which will come into force in the third quarter of 2012, EU insurers will only be able to take full account of reinsurance ceded to other EU insurers or to insurers domiciled in jurisdictions outside the EU (“third countries”) that have been granted equivalence status under the Solvency II Directive. CEIOPS, the Committee of European Insurance and Occupational Pensions Supervisors, is currently developing criteria for assessing equivalence and expects to finalise these in March 2010.
Guernsey is a “third country” under the terms of the Directive and would need to achieve equivalence if EU fronting companies ceding reinsurance to Guernsey captive insurers were not to have to hold additional capital, which in turn could be reflected in higher fronting fees. In addition, Guernsey commercial reinsurers would suffer a competitive disadvantage compared to other jurisdictions that were either EU Member States or had themselves achieved equivalence status.
The Commission is currently following Solvency II developments closely and is in contact with members of CEIOPS and the CEIOPS secretariat to confirm the process and requirements for achieving equivalence. As the largest captive jurisdiction in the European geographical region we are also following and contributing to the evolving debate on the application of Solvency II to captive insurers in the EU as this will have an impact on the changes needed to the Guernsey legislation and requirements to achieve equivalence status. We are also in touch with interested bodies such as AIRMIC and the European Captive Insurance and Reinsurance Owners Association (ECIROA). We are planning to hold talks with insurance supervisors and trade associations in the European captive jurisdictions Dublin, Luxembourg and Malta.
It is our understanding that in order to achieve equivalence, it will not be necessary to mirror precisely the requirements of the Solvency II Directive and its associated guidance, but nevertheless achieving equivalence status will require a number of changes to the current Guernsey insurance legislation. Changes will in particular be needed in the areas of corporate governance and solvency assessment. A number of simplifications should be possible for the smaller and simpler captive insurers, particularly as the Directive makes allowance for "proportionality" in the application of its requirements.
The introduction of the Guernsey “OSCA” (Own Solvency Capital Assessment) requirements last year has ensured that the boards of insurers give full consideration to the potential risks that could impact on companies in assessing their own solvency requirements. This is a similar concept to the “ORSA” (Own Risk and Solvency Assessment) requirements in the Solvency II regime.
The Commission is currently considering the required legislative changes as the full details of the Solvency II regime emerge; these will need to take account of the final terms of the equivalence criteria when they are known.
There will be a presentation on Solvency II equivalence at the GICMA seminar on 1 October, the Commission is planning to hold further training seminars prior to the end of this year on the details of the Solvency II regime. If you have any specific comments or concerns however, please let me know and we will try to address them.