“The looming implementation of Solvency II is bound to change the market environment dramatically for captive insurers, as parent organizations take a fresh look at captives’ role in light of increased regulatory requirements under the new regime,” it said. “Regula­tory capital requirements appear certain to increase dramatically – as much as three- to fourfold for EU-domiciled captives.”

It added captives writing business inside the EU but domiciled elsewhere will find their fates tied to the achievement and application of regulatory equivalence with the new EU system.  Since many captives operate as reinsurers, equivalence could be a key consideration, as some reinsurance business is already supported by collateral or deposits of reserves with a fronting company.

The rating agency said it means captive centres “clearly have a difficult balance to strike between obtaining equivalence and remaining attractive to captives; deci­sive factors are likely to be how proportionality is implemented within the EU and the impact of collateral posting on captives”.

The report said captives need to prepare for the worse case scenarios when it comes to solvency requirements in order to minimise the impact of the new regulations when they are eventually introduced.

“ A M Best believes that captives able to obtain a secure financial strength rating should not have major difficulties adapting to Sol­vency II; strong risk-based capital, robust risk management and governance, close integration with a securely rated parent and effective reporting systems will leave captives well positioned to satisfy the demands of the new regime,”  the report added.