Governance, risk and compliance: optimising your captive’s strategy

April 22, 2019

Captive International, October 9, 2018

In this article in Captive International, Derick White and Stuart King of Strategic Risk Solutions, discuss the corporate governance requlations in US, European and offshore domiciles and how they apply to captives.

A captive insurance entity is fundamentally different in comparison to a commercial insurer yet, as of today, the regulatory treatment and expectation between the two differs greatly across the global landscape.

Notwithstanding the fact that the commercial insurance industry establishes captive entities for internal capital optimisation or segregation of complex risks, most captives are consolidated by a non-financial parent organisation. Therein lies the regulatory challenge and what many captives owners consider to be a disproportionate treatment by supervisors.

At the heart of a regulator’s duties is to act as a final line of defence to ensure that insurance entities do not represent a systematic financial country risk or adverse impact to consumers.

A captive insurance entity fails both of these broad tests as described below:

  • Systematic financial risk: by virtue of being consolidated in to numerous industry sectors, contributing to diversification, a failure of a captive is highly unlikely to affect the functioning of local or global financial markets; and 
  • Consumer risk: albeit in rare occasions where third party business is conducted, a captive’s strategy is that of providing insurance protection to group related entities. Therefore, the insured is a legal entity with little to no consumer risk.

A European Perspective

The regulatory response to the financial crisis of 2007 and governance reforms in financial services have overall been positive for the economy. The accountability and responsibility of individuals running financial services firms has increased substantially.

However, for captives owners, particularly in Europe, the regulatory regime Solvency II (implemented in 2016) has resulted in an overwhelming deluge of what many owners see as an increasing amount of non-added value governance requirements.

The Directive has no less than 3,200 pages of regulatory text and guidelines, no less than 30 policies and an equal amount of processes and procedures. The requirement for independence across key functions challenges captives that often rely upon professional third-party service providers. This often inflates the cost of a running a captive with little added value in addition to distracting C-suite executives from the wider risk finance benefits a captive provides.

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