- Reinsurance only captives would restrict domicile potential
- Compulsory lines and direct writing would givewider appeal
- Opening PCCs to captive business could access UK middle market
The captive market may only get one shot at designing an optimal regulatory regime in the United Kingdom, so how it responds on a series of key questions is likely to determine its impact on the wider industry.
Chancellor Rachel Reeves MP announced the launch of the three-month consultation last week and the captive market is now positioning itself to respond.
Airmic, the UK’s risk and insurance management association, moved quickly to convene a meeting of its captive owning members on Thursday, 20 November and is establishing a Working Group to organise and provide its official response.
“Airmic’s mission is to best represent the interest of members and potential members,” CEO Julia Graham told Captive Intelligence.
“As representatives of insurance buyers, we aim to ensure they have as many good quality captive domicile options available as possible. We represent members with captives in all the major domiciles and believe we can bring their experience and insight to this consultation process.”
Graham said the consultation was welcome news for Airmic members and the wider captive market, but now is the opportunity to ensure any regulatory regime is fit for purpose and a genuine option for captive owners.
“The United Kingdom has, almost all, the potential ingredients to be an attractive jurisdiction for captive insurance companies, but what is missing is a proportionate regulatory regime that takes into consideration the lower risk captives pose to consumers and the financial system,” she added.
“We believe the consultation is asking the right questions to achieve an effective regulatory framework, and Airmic will now work closely with members to produce a formal response.”
Those questions in the consultation range from whether just reinsurance or direct writing captives as well should be facilitated, if captives should be permitted to write compulsory lines and life insurance and the potential benefits of opening up the existing protected cell company (PCC) regime to captive business.
At this stage, London Market Group CEO Caroline Wagstaff is keen to drum up as much support and participation for the consultation as possible, while key captive management and fronting firms are beginning to consider how they will respond and what they want to push for.
Reinsurance & direct writing
One area that will invite plenty of comment is whether the UK wants to facilitate both reinsurance captives – meaning those that simply reinsure the group’s own risk with the help of a fronting partner – and direct writing captives.
While most industry players contacted by Captive Intelligence believe having the ability to do both would be the optimum outcome, opinion is split on whether it should be an essential ingredient from the outset or something the regime adds at a later date.
Huw Evans, UK head of insurance at KPMG, believes one option could be that UK captives begin by being reinsurance only but “graduate” towards direct writing after several years of business.
“As a long-term view, we support the inclusion of both reinsurance and direct writing captives in the UK as they serve different purposes,” Evans told Captive Intelligence.
“Captives limited to a reinsurance status will be a good first step given that they generally create lower risk as they rely on the established commercial insurance industry, including fronting carriers and brokers.
“This will create an additional layer of controls and balances, but potentially hinder the competitiveness of the domicile compared to overseas jurisdictions or Lloyd’s offering.
“Allowing reinsurance captives to graduate into direct writing captives after a certain number of years in business would be the natural next step and offer an option for well-established and sophisticated insurance buyers to build on their experience.”
William Thomas-Ferrand, international practice leader at Marsh Captive Solutions, and London-based Charles Winter, head of strategic risk consulting at Aon Global Risk Consulting, told Captive Intelligence they think direct writing and reinsurance should be given the green light from the off.
“Fundamentally I would absolutely support both forms of underwriting by captives and this should be clear from the outset, particularly when risks are already being retained by the UK corporate who is setting up a captive,” Thomas-Ferrand said.
“In this scenario formalizing the retention of risks through using a captive can only assist and bring the risk retained into the regulated sphere.”
Winter said he would be concerned for the viability of the regime if UK-domiciled captives were overly restricted, emphasising the importance of insureds having a “broad range of options”.
“We would expect proportionality and so the closer a captive comes to operating as a commercial insurer then the more oversight it will receive,” he added.
Peter Child, CEO of SRS Europe, highlighted that the UK already permits non-admitted paper from insurers and so allowing UK-domiciled captives to operate on both a reinsurance direct-writing basis should be a natural extension.
“Given the relative openness of the UK market to non-admitted paper it would be a missed opportunity not to enable the establishment of both,” he told Captive Intelligence.
“The regulatory risk arising from each type of captive has the potential to be materially different, and any new legislation will, I’m sure, recognise this.”
Oliver Schofield, managing partner at independent consultant RISCS CWC, agreed that having both options available would be beneficial but questioned whether direct writing would be a common solution for many applicants.
“A direct writing captive in the UK could reduce the need for fronting, but we would caution that using a captive instead of an established UK insurer might not be the panacea that firms believe it is given the UK insurers’ additional services such as tax collection and payment, certificates of insurance – particularly where rated paper is required,” Schofield explained.
“This would need to be carefully considered by any UK captive users. Reinsurance captives in the UK will deliver all the usual benefits for captive users, but of course there may be the need for collateral to be posted to the fronting insurer.”
All the large multinational captive fronting networks already have significant infrastructure and talent based in the UK and naturally it is within those organisations’ interests to promote the reinsurance captive approach.
However, Stuart Hayes, manager for global captive fronting and alternative risk transfer at Allianz Commercial, said that having the flexibility to do both would be welcomed
“Differentiation can facilitate flexibility,” he told Captive Intelligence.
“Reinsurance captives are a logical starting point in comparison with other regimes. Direct writing has greater considerations and adopting a two-speed approach may allow time for the authorities to determine the appropriate and proportionate regulatory requirements.”
Compulsory lines and life
On compulsory lines, the government’s starting point is that captives should not be permitted to write them or life insurance policies due to their long-term nature.
In the UK, motor insurance and employer’s liability are compulsory lines.
The captive market, however, particularly the management and consulting community, is keen to highlight that compulsory lines and other policies that may impact third parties, directly or indirectly, can be safely insured through well-regulated captive insurers.
Salil Bhalla, manager of global captive fronting at Allianz Commercial, said it seemed like a “prudent approach” for compulsory lines to be treated differently, but noted that it could impact the attractiveness of the UK as a captive domicile for some companies.
Schofield told Captive Intelligence he believes it would be a “missed opportunity” for compulsory lines not to be permitted.
“Many captives write life and compulsory lines already so there will be no incentive for these existing captives to users to flip from their existing domicile to the UK,” he said.
“Furthermore, other captive domiciles successfully manage the additional regulatory requirements of these lines so there is a blueprint of success already out there. Definitely a missed opportunity.”
Winter added: “We appreciate why there may be concerns regarding compulsory insurances but this could be a real differentiator and there are examples of captives within the EU writing pan-European motor business successfully so the possibility should not be discounted out of hand.”
KPMG’s Evans said compulsory lines may be an ideal opportunity for a pilot scheme, which would inform potential expansion of captive utilisation into these areas, while Derek Bridgeman, deputy CEO and risk consulting leader at SRS Europe, said the UK could look to Gibraltar’s dual regime for inspiration.
“The exclusion of life insurance and compulsory lines of insurance from captives is designed to minimize risks to financial stability and consumer protection, but the exclusion should be limited to the direct writing captive option,” Evans said.
“Many companies already use offshore captives and other structured insurance agreements to underwrite those risks via a fronting carrier that holds the appropriate UK insurance licence.
“This consultation presents an opportunity to adopt a proportionate framework that mitigates risks without encouraging regulatory arbitrage.
“The current situation offers the right level of protection for policyholders and related beneficiaries and therefore could be integrated with the UK captive insurance regime.
“Careful consideration of phased or restricted inclusion of certain lines under controlled pilot programmes could enhance the regime’s attractiveness while addressing concerns around systemic risks.”
Bridgeman said: “We would recommend that the current regime in Gibraltar is considered. One where direct writing of compulsory lines is permitted, albeit only into the UK, naturally the regulation of these vehicles would be higher.”
He highlighted that there would need to be “minimal arbitrage” between the UK and Gibraltar since the Prudential Regulatory Authority (PRA) ultimately oversees the regulation of such entities in Gibraltar.
There will be a broader debate on international employee benefits and medical, and where that might fit into a UK captive regime, but on life insurance specifically there may also need to be a consideration for pensions.
“Few captives write long-term life business so this is unlikely to be a major concern, but we would like to see the ability to write annual term life business as part of a group employee benefits programme,” Winter said.
“Whilst still a niche topic, captives are being increasingly used in pension de-risking strategies and consideration should be given to that.”
Protected cell companies
The UK already has protected cell company (PCC) legislation and a regulatory framework in place, but it is limited to insurance-linked securities (ILS) business.
London’s ILS regime has not taken off and there is a strong argument that opening PCCs up to captive business may revitalise and reboot the UK’s cell company offering.
As with captive domiciles generally, British businesses are well served by PCC structures – commonly making use of facilities in Guernsey, Isle of Man, Malta, Bermuda and other international jurisdictions.
It would be the UK middle market most likely to benefit from a PCC regime, since cells often lower the barriers to entry for insureds, and while Aon’s Winter said the opportunity should be taken, cell companies could be a secondary consideration after achieving a proportional and attractive regime.
“Given the PCC legislation already exists in the UK, the ability to apply it to captives could prove an attractive differentiator, particularly for the national/mid-market, although it is secondary to the right regulatory regime,” he said.
Schofield agreed that cells would be a useful tool to the middle market and SME community.
“There remain a significant number of UK SMEs and start-up businesses that would benefit from having a cell captive to incubate some of their emerging risks or some specific harder to insure risks,” he told Captive Intelligence.
“I see the inclusion of captives in the UK’s PCC regime as being of fundamental importance for UK businesses and to not include it would be another missed opportunity.”
Evans said opening up PCCs to captive business would be “highly beneficial” and provide potential applicants with a greater choice of appropriate structure.
He cautioned, however, that “robust ring-fencing and governance standards will be crucial to ensure that PCC structures retain the trust of all stakeholders and avoid liability cross-contamination”.
“PCC structures allow corporations to segregate and manage their risks more efficiently, providing a cost-effective solution for risk retention and management,” Evans said.
“This can attract a broader range of businesses, in particular mid and small corporations, to consider utilising a captive.
“The success of PCC structures in other jurisdictions, such as Guernsey, underscores their potential for expanding market accessibility and supporting a more diverse pool of businesses in the UK.”
Broad support
While the above debates may divide some opinion amongst the market, and different interests have varying priorities, it is fair to say the full spectrum of the captive community is supportive of the consultation and the idea of a feasible UK domicile.
“Captives are of more strategic importance to managing risk than they have ever been before and embracement of the concept in an onshore fashion will allow the UK to lead in the innovative area of risk,” said Thomas-Ferrand, who will assume leadership of the global Marsh Captive Solutions business on 1 January.
Philip Jacob, director in PwC’s insurance team, said there is clearly appetite amongst the UK business community to explore a captive option closer to home.
“From discussions with our UK-based clients we have seen an appetite for a UK captive regime – whether out of a desire to support their local economies, the benefits of having colleagues located close by, having access to the UK’s specialist insurance skills and support services, or simply having another captive domicile option,” he told Captive Intelligence.
“Clients with existing captives, however, acknowledge that redomiciling may take time and be costly. For those UK companies without captives, the right kind of regime may be the thing that tips the balance.
“There is an opportunity for a carefully chosen regime to bolster the UK insurance market, retaining jobs and economic activity that might otherwise take place offshore, and we look forward to seeing where this consultation goes, for our clients, for the insurance industry and for the UK economy more broadly.”
Esme Gould, head of captives & ART Zurich Commercial Insurance UK, told Captive Intelligence that the insurer welcomes the consultation, will be supporting its customers and reviewing experiences from other jurisdictions.
“This would bring capital into the UK and could attract new companies looking to set up under a domestic regime,” Gould said.
“With the right regulatory structures and the expertise within the London insurance market, the UK could be a popular jurisdiction for captives.
“While a UK regime will be positive for the UK economy, it will need to a be subject to a proportionate regulatory approach in order to compete with other jurisdictions.”