Solvency II and the flight to certainty...

With the EU's proposed Solvency II revamp for insurance and reinsurance business continuing to be heavily debated uncertainty abounds. Core questions still remain to be answered over the final form, the implemention time line, the ultimate impact on captive insurers and will non-EU insurers and reinsurers achieve equivalency?

The EU is (in) famous for "throwing the baby out with the bathwater" when it comes to new legislation and Solvency II is turning out to be no exception. In fact, it is in danger of becoming an insurance version of the much-hyped Y2K crisis in terms of the amount of time and money being spent to implement the new (and ever changing) rules. 

While a new "one-size-fits-all" approach to risk and capital adequacy for the European insurance industry makes sense for the regulators - within the context of a common economic zone - it ignores the fact that insurance is a global marketplace. Setting out to create non-equivalent legislation solely for EU-based insurers and reinsurers is not necessarily a good development for the industry as a whole. It is also commercially naive to try and apply the same solvency rules to both an Irish reinsurance captive and a large European commercial reinsurer. 

When it comes to the captive insurance industry, the EU has made, what amounts to, passing comments such that "captives will be looked after in the final rules" and that they are expected to receive proportional treatment.  However, it is still uncertain what this means or whether any action will be taken at all. This lingering uncertainty must be a very real concern to EU-based captive-owners and their advisers. News that Guernsey - Europe's largest captive domicile - is not seeking equivalence between its own solvency rules and those of Solvency II should force EU regulators to reconsider this "mānana mānanaapproach to the European captive insurance industry. 

In terms of equivalence, the same observation is true for Bermuda and Switzerland and their intention to seek equivalence with Solvency II. While it is clear that Bermuda is trying to protect its larger commercial reinsurers, it can only do so at the expense of its highly-prized captive insurance industry which of course is dominated by US owners. Gaining equivalence for large reinsurers would come at a very high price for Bermuda and their US captive client base.  The desired outcome for Bermuda would be equivalence excluding its captive industry. This will never happen. Unless EU-based captives receive the same treatment, Bermuda would be handed an unacceptable competitive advantage in a move that would amount to an "own-goal" by EU regulators.

Regardless of how captives are ultimately (mis) treated under Solvency II and non-EU domiciles are treated in terms of equivalence, I cannot help thinking that Guernsey has cleverly positioned itself to take advantage of any fallout. Given the continuing uncertainty over many aspects of Solvency II, will there now be a flight to certainty with Bermuda's commercial reinsurers and Ireland's mature captive industry re-domiciling their operations (and regulatory oversight) to Guernsey in advance of the Solvency II implementation deadline of January 1, 2014?