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Unlocking opportunities for captives following proposed changes to Solvency II Directive

Are you aware of the forthcoming amendments to the Solvency II Directive that could offer significantly advantages to Captive Owners?
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By Bradley Wade , 

Vice President, Analytics Solutions

21/01/2025 · 4 minute read

Unlocking opportunities for captives following proposed changes to Solvency II Directive

The Solvency II Directive (the “Directive”), which establishes regulatory requirements for (re)insurance companies within the European Union, has been undergoing a thorough review process over the past several years. A consensus has now been reached on the proposed amendments to this Directive. Marsh has publicly and vocally supported this review process, and we are enthusiastic about the forthcoming implementation of these changes, which are set to significantly benefit captive owners.

Here we offer a concise summary of the significant changes affecting the three pillars underpinning the Directive — with a further spotlight on changes most relevant to captive owners — as well as the changes to the criteria whereby insurance companies, including captives, can be classified as a small and non-complex (S&NC) undertaking and can therefore benefit from certain proportionality measures. The changes are scheduled to take effect on 1 January, 2026.

How does the Directive define S&NC undertakings?

Entities that meet the risk-based criteria (details not provided here) should be eligible for classification as S&NC through a straightforward notification process. Once classified as an S&NC undertaking, these undertakings should, in principle, automatically benefit from identified proportionality measures. Key measures are outlined below.

Key benefits to captives of S&NC status

Captive owners will benefit from the following new key proportionality measures for S&NC, in terms of time and cost savings from reduced administrative burden:

  1. The own risk and solvency assessment  review will occur biennially, with simplifications to the review process, such as the removal of macroprudential analysis and climate change scenarios
  2. A balance sheet audit is not required
  3. Review of written policies (for example, underwriting policy) required every three years
  4. For the solvency and financial condition report (SFCR), only quantitative data is required annually, with a full report submitted every three years
  5. The regular supervisory report (RSR) is required every five years, with simplifications applied to the solvency capital requirements calculation

It is important to note that the proposed changes do not specify the frequency of the actuarial function holder’s review. Currently, this review is conducted annually and includes the issuance of the actuarial function report.

Wider changes and potential benefits to captives

In addition to the benefits derived from the aforementioned proportionality measures, we foresee several other areas where our captive owners may gain advantages, particularly within the three pillars underpinning the Directive. The primary benefits include enhanced efficiencies and reduced reporting requirements, resulting in decreased time commitments from third-party service providers and increased cost savings for the undertakings, where applicable.

Significant changes impacting the three pillars underpinning the Directive are outlined below. All undertakings are required to comply with these changes. However, undertakings with S&NC status will be exempt from some of these requirements. Further information on these exemptions will be provided in a follow-up article.

Pillar 1 — Quantitative requirements (calculation of insurance liabilities and risk-based capital)

Key changes advantageous to captive owners:

  • The risk margin cost of capital (“CoC”) parameter is set to be reduced from 6% to 4.75%. This adjustment aims to release 'trapped cash' and will enhance the eligible capital amount held on the Solvency II balance sheet. This change aligns with the measures already implemented in the UK, where the risk margin CoC has been reduced from 6% to 4%.
  • The allowance for negative interest rates will impact the solvency capital requirement calculation, including the interest rate sub-module.  
  • The review of natural catastrophe risk is currently underway, focusing on the incorporation of new perils and territories to ensure the calculation more accurately reflects the current risk landscape.

Pillar 2 — Qualitative requirements (Supervisory review — governance and risk management)

Key changes advantageous to captive owners:

  • Promotion of diversity through strategic board composition, with a focus on gender diversity objectives, to enable a broader spectrum of thoughts and strategies.
  • A single individual may perform multiple key functions, contingent upon supervisory approval and the effective management of potential conflicts of interest.

Pillar 3 — Transparency and disclosure (reporting and market discipline)

Key deadlines advantageous to Captive owners (calculated from the valuation date):

  • Annual quantitative reporting templates extended from 14 to 16 weeks.
  • RSR and SFCR extended from 14 to 18 weeks.
  • Group SFCR extended from 20 to 22 weeks.

Developments in the UK captive regime consultation

In a recent policy statement (PS15/24), the Prudential Regulation Authority (PRA) announced the commencement of implementing its review conclusions in the UK, effective from 31 December, 2024. This initial phase will focus on replacing references to legacy EU 'assimilated law' within PRA rules, policy materials, reporting and disclosure templates, and insurance special purpose vehicle templates and instructions.

This critical initial step lays the foundation for any forthcoming modifications following the recently confirmed UK consultation on captive insurance regulation. However, the specifics of a potential UK captive regime and the broader 'Solvency UK' framework remains to be determined.

Chris Lay, CEO of Marsh McLennan UK, along with William Thomas-Ferrand, International Captive Practice Leader at Marsh Captive Solutions, and Matthew Latham, Alternative Risk Transfer Leader at Marsh UK, engage in a discussion on the UK captive regime in the GCP Short: What would make a successful UK captive domicile? - Captive Intelligence.

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