France’s dramatic entrance into the captive market has been the standout captive story of 2023 and 2024, and the United Kingdom has a similar opportunity if the government grasps it in 2025.
I will forgive our non-European readers for tiring of our focus on captive developments in France and the UK over the past 18 months, but the French initiative in particular has produced an unprecedented growth story for a new European captive domicile.
It has highlighted just how much untapped potential there is for new captive business in Europe should the right tools be made available to a broader range of insureds.
The ‘home domiciling’ movement has, at times, been met with suspicion and scepticism by many, including this writer and some prominent captive professionals, who are unsure of the motivations and staying power of large industrial nations now arriving to the captive party some 40 or so years late.
France
France has been the trailblazer in Europe. Patriotic effort may not be the appropriate term, but there is a tangible sense of community that has been harnessed and a pride amongst this new cohort of French captive owner, as well as the consultants and underwriters supporting them.
We are often quick to herald new trends in our market – none more so than us in the captive press – but it is safe to say France is on a consistent and successful growth trajectory.
The French Captive Federation (FFCE) is laying down a foundation to build something sustainable. Demystifying captives for a broader range of the French business community is a strategic endeavour already paying dividends.
It does not appear at risk of being a passing fad either. Twenty new captives are not formed by big businesses on a whim.
I attended the first France Captive Forum in Paris last month and it was plain to see the momentum being developed, with almost every new captive owner of the past two years taking the stage.
Having a posse of new, enthusiastic captive owners sharing their stories is a very good look, not just for France but for the wider market too.
Aside from the food for thought it provides prospective captive owners, it reassures sceptical regulators and tax authorities that captives have nothing to hide.
The French regulator (ACPR) and Treasury representative were conspicuous in their presence at the event, speaking warmly about the experience to date and positive about future prospects.
By no means is the ACPR perfect and consultants always want processes to happen faster, and in a more proportional way, but the numbers speak for themselves. The ACPR is open to business and not getting in the way of good, organised applicants.
Putting the legislation and regulation in place is one thing, but drumming up quality candidates and getting those first applicants through a new process is a whole other challenge.
The captive industry is well served by France-based consultants, underwriters and actuaries and they have now been further energised by a new product and location to sell – home.
Limitations remain, however. International employee benefits is a significant growth area for captives in Europe and on the agenda of many corporates. While reinsuring EB to a French captive is possible today, it would not benefit from the equalisation reserve and combining it with P&C business is not permitted.
That stance, currently, puts France at a disadvantage compared to neighbours Luxembourg and Switzerland, for example.
Amrae, FFCE and the local market is lobbying for a change that would allow the reinsuring of benefits in combination with P&C. Based on their track record to date, I would not bet against them.
Entente Cordiale
All this is to say the UK – government, regulator, local market and associations – have, in the French experience, a lot to take and learn from.
The two cases are not identical and there are significant differences, but in terms of developing a new captive regime and a motivated ecosystem there are parallels.
Due to Solvency II, France is restricted in a way that a potential UK regime has no reason to be. France has little room to improvise or innovate, but it did look to Luxembourg for a successful model that works.
While not quite matching the Duchy’s equalisation provision, it has sought to get close to it, dangling a juicy carrot to get companies curious while convincing the market it is serious about its proposition.
The UK must be similarly bold. An equalisation reserve may be a cultural step too far, but not limiting itself to just reinsurance, permitting EB, compulsory lines and direct writing should all be on the agenda.
Not permitting captives to write EB would be a limiting factor on future growth, and this should be highly relevant for the UK.
The consultation, launched last month, poses a specific question on life and employee benefits, along with similar ones related to compulsory lines and whether to permit direct writing or solely reinsurance programmes.
The government and regulator’s starting point, understandably, is one of caution and suggests it is not keen on opening the door too wide to captive business.
They are, however, asking the question which suggests they are open to being convinced otherwise. In the UK context, it feels essential that the market makes the case for as ambitious a regime as possible from the get-go.
It otherwise risks ruling out large, growing swathes of potential captive business before it even gets started. Having a regime that is relevant to a few government entities and a handful of middle market firms may end up feeling like it was not worth the effort.
To make an ambitious regime possible will require serious responses to the consultation packed with substance-based contributions. I do not doubt the UK market is up to the task.
I am aware of the continuing efforts of the London Market Group, which is rallying the wider commercial market to participate and hosting a series of roundtables in January, while Airmic is establishing its own Working Group to inform its response to the consultation.
It will then be in the hands of the government and the PRA as to how ambitious it wants to be, or whether it is prepared to proceed at all.
Inspiration or competition
While France has Luxembourg to look to for inspiration, the UK has Guernsey and the Isle of Man off its shores. Offer something close to their regulatory environment and couple it with the ingrained local infrastructure, corporate insurance pedigree and talent pool, and it’s got a good chance.
The additional choice and competition will be good and, as we have seen in France, can flush out a new generation of captive owner who, perhaps, were reluctant to domicile a regulated subsidiary abroad.
It bears repeating that France’s growth over the past two has not come at the expense of Luxembourg or other traditional European domiciles. Only one of the 20 captives formed to date has been a re-domestication.
There is, understandably, concern from established domiciles such as Guernsey and the Isle of Man, which have been the natural home for UK-owned captives.
For new domiciles however, the priority must be to look for new captive candidates. As already demonstrated, it is the best way to build a successfull movement, rather than simply cannibalising already successful jurisdictions.
Ten years ago, the United States’ sudden and drastic domicile proliferation was partly motivated by tempting re-domestications, but their sustained growth has ultimately come from enticing new formations.
Thankfully, captive managers and consultants are incentivised to find and form new captives, rather than rob Peter to pay Paul. I cannot imagine it being in the large captive managers’ interests to gut successful domicile offices of their long, hard-earned business.
If the UK were to take this next step, present a proportionate, innovative and appealing captive domicile, I do not doubt our captive consulting friends will be motivated to find a first handful of good candidates and get them over the line.
Developing new domiciles should be about growing the pie, not just sharing it out in ever diminishing portions. The UK has an opportunity to join this European revolution. I look forward to seeing how it responds in 2025.