The Prudential Regulation Authority’s (PRA) proposal to allow UK captives to insure owner-controlled insurance programmes (OCIPs) could boost the appeal of its pending captive regime among companies involved in major infrastructure projects.
The PRA outlined its draft regulations (CP11/26) for captives in the United Kingdom on 14 July, including a new “proportionate and tailored” solvency regime outside of Solvency UK.
Speaking on the latest episode of the Global Captive Podcast, Paul Eaton, CEO of Artex EMEA, and Martin Le Pelley, head of risk & compliance at Artex, examine the draft proposals for a bespoke UK captive regime, including the permitted lines of business and the inclusion of OCIPs.
Eaton’s response to the draft rules is positive and believes the proposed permitted business was broad enough to make the jurisdiction an attractive option for prospective captive owners.
“If you are asking whether the proposition is sufficient to get us going, it is, definitely, because it’ll cover most property and casualty lines,” he said.
“I can see this being the starting point from which we evolve, but I think there’s enough there to get us started.”
Le Pelley is particularly excited about the explicit mention and detail concerning owner-controlled insurance programmes (OCIP).
An OCIP is a centralised insurance arrangement established by the owner of a major construction or infrastructure project to provide cover for the owner, principal contractor and participating subcontractors involved in the project.
OCIPs are typically used for large-scale projects such as airports, highways, power stations and other major commercial developments.
“Having a UK regulator and a UK-regulated captive involved in a UK-based construction or infrastructure project, with the subcontractors also based in the UK, will make it much more compelling to service-provider subcontractors than if the project were insured through a non-UK-regulated entity,” Le Pelley said.
“Think about HS2 and the third runway at Heathrow, for example. There are going to be companies or project managers out there that will want to find the most effective way to manage the risks of those projects.
“What the PRA seem to have done is accommodate that through this OCIP, owner-controlled insurance programme-type facility, which will be 100% able to be insured through a captive.”
Le Pelley said the PRA appears to have considered the potential for “material saving” through the use of captives for OCIPs.
“If a project has lots of moving parts and there is a degree of risk associated with those projects, rather than having them carrying that risk on the balance sheet or, worst-case scenario, having the government acting as the insurer of last resort where the project goes wrong, this is a way of making sure that the project itself can be managed in a much more risk-effective way,” Le Pelley said.
“That obviously will save everybody money in terms of end users, contractors, anybody who’s involved in the project, including the government.
“It will be a win-win, hopefully, to allow this to be the case.”
Le Pelley said the governance of OCIP captives, and how firms will need to evidence correct risk management around these projects, will be critical.
“I’m sure if a captive is insuring an OCIP-type structure, the PRA will look at it with a real, detailed eye because they will want to make sure that the board and the manager have really thought about every aspect of what will go into that,” he said.
Eaton and Le Pelley both believe the addition of a protected cell companies (PCCs) after pure captives go live will be key to broaden the appeal of the regime, while a defined re-domiciliation process is also required.
Eaton said he was “a little bit surprised” that there was no differentiation between different classes of employee benefits.
“But maybe we’re getting a little bit too stuck into the weeds at this stage,” he said.
“I can see this being the starting point from which we evolve, but I think there’s enough there to get us started and certainly nothing to prevent anybody that would be interested in this from proceeding unless they had something very specific.”