The European captive insurance market is facing challenges emanating from both the economic and regulatory fronts, a new report from A.M. Best  finds.

The report, “Europe’s Captives Navigate Recession, Regulatory Changes” acknowledges that while many factors may cause companies to reconsider operating a captive, the lingering impact of the credit crunch paired with the specter of Solvency II were the most prominent.

“The cost of complying with increased regulation, combined with the general desire to achieve greater capital efficiency in the wake of constrained capital markets, has resulted in parent companies increasingly evaluating the effectiveness of using captives,” Yvette Essen, head of market analysis for A.M. Best and author of the report. “Specialist insurers are consequently developing exit models to run off captives, or to purchase some of the liabilities associated with them.”

Indeed, the report notes that while captives have historically enjoyed a light regulatory regimen in Europe that is no longer the case.

“Solvency II remains among the biggest hurdles for the captive community ahead of the directive’s scheduled introduction at the end of 2012,” the report states. “There are fears that smaller and more recently established captives may not have built sufficient surplus to comply with financial requirements under the pending regulation. Furthermore, companies are bracing themselves for increased demands on management time to meet the risk management requirements of Pillar 2.”

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