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Finance, Insurance, Regulation

SPVs and Solvency II dominate discussions

The MFSA is preparing to introduce so-called Special Purpose Vehicles (SPVs) and incorporated cell companies (ICCs) to the Malta as risk management tools, Joe Bannister, MFSA Chairman announced in his overview of the Maltese insurance market for the Malta Insurance Rendezvous held on 4 and 5 March 2009.

 

Discussing insurance

Discussing insurance

Since the first Rendezvous in November 2007, there have been substantial changes in the sector in Malta. There are now three protected cell companies, from the first one, Atlas Insurance PCC which had only just completed its conversion to the innovative structure. What is more, there are now 10 licensed cells in operation. The number of managed insurers has grown substantially, from fewer than 20 to more than 30 now – with more in the process of obtaining their licenses.

But some things have not changed: most of the insurers are direct writers, not pure captives as in other captive insurance jurisdictions. That is, they cover risks for organisations and people who are not their owners or parent.

One other thing had not changed: the new regulatory regime governing an insurer’s capital requirements, Solvency II, continues to command a lot of attention. This represents a risk-based approach to the determination of the capital an insurer needs to cover the risks it has underwritten, modeled on the Basel II capital regime now being applied to banks.

Like Basel II, Solvency II works on three pillars: the core quantitative requirements, a second strand of qualitative requirements related to internal control and management and a third pillar focused on reporting and disclosure.

The system was explained in detail by Dr Marisa Attard, Director of Insurance at the MFSA and Michaela Koller, the Director General at CEA, the organisation representing the European insurance and reinsurance industry. Solvency II is not, however, a carbon copy of Basel II. It does pick up some of the same principles, seeking to accurately value each risk covered and taking into account a variety of organisational and environmental risks that may affect an insurer. This calculation will work through three basic modes: a standardised approach taking the industry average as its baseline, a fully internal model developed for a specific insurer and an intermediate model. This is, again, similar to Basel II, subject to the proviso that risks in insurance are very different to those faced by banks.

The processes Solvency II will demand of insurers are complex and potentially expensive, a point made by the third person speaking during the Solvency II session, Jeanette Rödbro, Executive Manager of ECIROA, representing European captive insurance owners. Part of the solution lies in simplifications that smaller insurers can apply to the core Solvency II requirements; this is one of the issues being negotiated furiously at the moment, according to Ms Koller.The other is the treatment of multinational group reporting.

The framework directive paving the way for Solvency II to be in place by 2013 must be approved by the European Parliament before it stops work for the European Elections. That was just 15 days away – and the price of failure, the real possibility that the entire framework would need review by the new Parliament.

Ms Rödbro pointed out a number of issues captive insurers have with the Solvency II regime. Many of these apply equally to Europe’s smaller insurers, representing some 80% of the market and including Malta’s insurance companies. Organisational changes could be necessary. But the cost of compliance in itself could be steep.

In preparation for Solvency II and to test the various structures and provisions, a series of quantitative impact studies (QIS) have been carried out. The latest was QIS4, and Europe’s insurers have participated strongly, certainly more than Europe’s banks did during the equivalent phase for Basel II. According to Ms Rödbro, completing the QIS4 reporting cost somewhere between €4,000 and €20,000 and took two weeks. A number of Malta’s leading insurers, talking after the

Malcolm Cutts Watson explains the use of SPVs in risk management

Malcolm Cutts Watson explains the use of SPVs in risk management

presentation, expressed surprise: they had spent much more, despite sharing the cost by jointly securing the services of specialised consultant for the purpose. While wary of the potential costs, they were broadly in favour of the new regime: it has the potential to improve risk management and to better match capital requirements to the actual risks carried. This, in turn should reduce the cost of capital and allow keener pricing of risk and thus of the premiums due. Good for the insurer, but also for the insured.  

 

In the current economic climate, a number of speakers made the case for captive insurance and other so-called alternative risk transfer (ART) tools. And Malcolm Cutts Watson and Dominic Wheatly, both from Willis, illustrated how the SPVs Prof Bannister spoke about in his presentation could, through securitisation, be used to effectively cede insurance based risk to the capital markets and spread more widely.

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