Regulation could change captives’ reinsurance appetite

Regulatory changes in the insurance market could have a significant impact on the amount of reinsurance purchased by captive insurers.

The Solvency II impact study, QIS5, has revealed that some captives have too much capital in the form of retained earnings or equalisation reserves. These captives are, therefore, looking for ways to use this capital efficiently instead of repaying it as dividends.

One way of doing this is by increasing their retention levels. “In this case they need less reinsurance, at least temporarily,” said Urs Neukomm, director at Swiss Re Corporate Solutions.

But the opposite will be true in some instances as there are also captives that do not have enough capital, according to QIS5. These will need additional capital and could buy more reinsurance.

“The only reason why this is not yet happening now are the regular delays of Solvency II: as long as these captives can stay alive with less capital in accordance with the current solvency regulations, they tend to use this opportunity,” says Neukomm.