- UK framework must be competitive to attract captives amid stiff competition
- LMG keeps pressure on Government with industry backed letter
- PRA must appreciate nuances of captives and regulate accordingly
- Increased NDF threshold for insurers under £25m premium not expected to be attractive to captives
While the Labour election victory on 4 July is expected to delay progress on the proposed United Kingdom captive legislation, local industry has not given hope of pushing the new framework through.
Prime Minister Sir Kier Starmer confirmed the appointment of new City Minister Tulip Siddiq MP on Tuesday and the London Market Group (LMG) is primed with a letter backed by UK brokers, captive managers, insurers and Airmic calling for the planned consultation to be published to gauge industry response and backing.
If the Labour government was to back a captive regime, it is imperative the jurisdiction provides an attractive framework amid growing, and existing, domicile competition across Europe and more globally.
Any UK captive regime would be focused on attracting new captive formations by UK companies, but there is interest in some re-domestications from established domiciles such as Guernsey and the Isle of Man, which are both home to a large contingent of UK owned captives.
Captive Intelligence is aware of several large UK publicly listed companies that would at least consider and evaluate the option of re-domesticating if an appropriate framework was enacted.
The UK is also expected to bring its own appeal for non-UK multinationals, considering the concentration of service providers and expertise in the London market, with the caveat that a proportionate captive regime is designed and implemented.
Speaking on the Global Captive Podcast in February Matthew Latham, alternative risk transfer leader at Marsh UK, said captives will likely require fronting partners and the UK has got several large fronting carriers with well-established London-based teams.
“You’ve also got reinsurance, not just on a traditional basis but also the alternative risk transfer market,” he said.
“I think that means that you might not just see UK companies being interested in the UK.”
While the former Conservative government had committed to moving ahead with the project, Captive Intelligence understands Labour, perhaps unsurprisingly, does not see it as a priority.
Pre-election, Labour’s previous shadow Treasury were briefed on the feasibility and benefits of having a captive insurance regime and the LMG remains committed to the project despite the election result.
Siddiq, the new City Minister who is responsible for overseeing the financial services sector, including the insurance industry, has previously said she wants to encourage the Financial Conduct Authority to try harder to remove barriers to competitiveness and growth.
“From a HDI perspective, we’re keen to hopefully see it progress, and we’re waiting with anticipation to see what the outcome of that is,” Oliver Davies, director of distribution and marketing at HDI Global SE & HDI Global Specialty SE, UK and Ireland, told Captive Intelligence prior to the election.
“We know that we’re going to wait for a new government, and the Treasury will re-review the proposals, and it will then take some time for all of that to work through.
“A lot of public sector businesses would benefit from captives being able to keep that capital in the UK, and we’ve got a great capability to try and support them on that.”
Caroline Wagstaff, CEO of the LMG, accepts that the new Chancellor is going to “have a lot on their plate”.
“I would hope that a letter from the LMG on behalf of the London market highlighting the financial and strategic benefits that a well-functioning captive regime would bring to the City and UK economy would reinforce our position,” she said.
Wagstaff added that if London is to remain the global centre of risk transfer, it needs to be able to offer all the “tools in the toolkit” and captives are a vital part of that.
“Globally, the market for captive insurance was worth US$69bn of premium in 2021 and is estimated to reach US$161bn by 2030,” she said.
It is important to note that the initiative to introduce a bespoke regulatory regime for captives in the UK is entirely separate from the Captive Syndicate project at Lloyd’s.
In the case of Lloyd’s, a captive will operate within Lloyd’s exactly like a traditional syndicate and would be overseen by the market, while a UK captive would be regulated directly by the Prudential Regulation Authority (PRA).
However, the two UK based captive propositions are expected to complement each other.
Taking captives mainstream
If the new Labour government does move ahead with the introduction of captive legislation it will certainly have industry backing from those who believe any such policy would bring captives further into the limelight.
“It will help bring captives into the mainstream even more than they currently are,” Mark Elliott, CEO at Guernsey-based Marco Re and a board member of the Guernsey International Insurance Association (GIIA), told Captive Intelligence.
“We just think it offers more choice and more options for buyers, which is a good thing for everybody.”
Elliott said that there would be pros and cons of the UK as a jurisdiction alongside all the other domiciles.
“That’d be up to clients to decide, but generally, I think we see it as a positive development,” he said.
Christopher Lay, CEO of Marsh McLennan UK, previously said on the Global Captive Podcast it is a shame the UK does not have captive legislation given the size of the UK insurance market and the capabilities of the London Market.
“It’s disappointing that we’re not leveraging that for the benefit of clients based here in the UK who are instead having to go overseas to find a domicile,” he said.
“Particularly at a time in what I call ‘post-Brexit adjustment’ where we have an opportunity to address some of the hurdles that were there previously, and at a time where captives are growing at a pace that we haven’t seen for some decades.”
Robert Geraghty, international sales and consulting leader at Marsh Captive Solutions, noted that if we look at owners of captives globally, US companies have the highest number of captives, but UK companies are second place.
“It would mean there’s potentially another option for them and for new potential UK companies implementing a captive,” he told Captive Intelligence.
“UK captives are everywhere and there’s a lot in Guernsey and the Isle of Man. Companies will look at the cost and qualitative benefit analysis of any potential relocation.”
Growing competition across Europe
The potential introduction of a UK captive regime comes amid a wider trend of new domiciles emerging across Europe over the past two years.
“Captives are an integral part of a risk management solution, and these domicile discussions bring them to the forefront,” Esme Gould, head of captives at Zurich Commercial UK, told Captive Intelligence.
“Companies who may not have considered captives in the past are looking at new ways they can manage their risk.”
The 2023 narrative was dominated by France, confirming its long-awaited reinsurance captive legislation at the turn of the year, while Italy licenced its first two captives despite not having specific captive legislation.
There have also been early-stage discussions in Spain and Germany concerning similar efforts. Germany already has several captives domiciled at home, but there is no tailored regime, while the Spanish risk management associations are trying to push discussions forward with the local regulator.
“Countries like France and Italy who have recently introduced a successful captive regime, have demonstrated an appetite amongst domestic businesses to have their captive closer to home – this is an appetite shared by UK businesses,” Wagstaff said.
“Establishing the UK as a captive domicile would strengthen the UK’s position as a genuine world leader in commercial (re)insurance and would also mean that the UK could take advantage of a rapidly growing global market.”
Peter Carter, head of captive and insurance management and head of climate practice at WTW, said France is a good case study that any UK captive regime should look towards.
“It shows how you can stir the market for those who are considering a captive but have not yet executed,” he told Captive Intelligence.
“The fact that someone can set up shop locally, without having to travel vast distances for board meetings, might also be very appealing.”
Owen Williams, AXA XL’s global programmes and captives regional director for the UK, Nordics & Ireland, said AXA XL sits closely to what has been developed in France by nature of the company, and he believes the UK can look across the Channel for a blueprint.
“We will need to do things differently in the UK of course, but I do remain optimistic that the UK will do this, and that it will work,” he said.
Carter said it is important the UK does not underestimate the competition it is going face from other domiciles.
“There are already 300 captives operating out of the Isle of Man and Guernsey,” he added.
“The question is, what does the UK offer that makes it an important jurisdiction? Why should you set up shop here instead of choosing what is already available?”
Elliott said the UK can take confidence from the number of new captives that have been formed in France.
“None of them are being taken from Luxembourg or another jurisdiction,” Elliott said.
“They are brand new formations, which is the exciting thing. Clearly, the devil will be in the detail around how the PRA and the Financial Conduct Authority structure the regulations to ensure that it is usable, and that will be the challenge.”
Key considerations for a successful regime
If any potential UK captive regime is to be deemed a success, it is important that several factors are taken into consideration in order to compete with other well-established domiciles, particularly neighbouring domiciles such as Guernsey and the Isle of Man.
“A new domicile takes time to mature, and I think for the UK unless it differentiates from what goes on in mainland Europe or in the Channel Islands, maybe with even more proportionality around solvency II, then I just don’t see how it can distinguish itself,” Carter said.
It is important that the PRA understands the nuances of captive insurers and commits to regulating them with a proportionate approach compared to larger commercial carriers.
“I guess the fear is that the PRA is used to regulating large financial institutions that could put the financial system at risk, so they understandably pursue a very rigorous approach,” Carter said.
“However, this is not appropriate for a captive predominantly dealing with first party risks.”
William Thomas-Ferrand, international captive practice leader at Marsh Captive Solutions, said the policyholder and the insured are effectively one entity, which he believes must be front of mind.
“Once you’ve got through that and the regulation side that embraces that, you then start talking to the other key factors,” he said on the Global Captive Podcast.
“Things like the speed of setup, the ability to innovate and to change regulation as things evolve.”
Finally, the PRA published a policy statement in June that confirmed it was increasing the annual premium threshold for small insurers to qualify under the non-Directive firm (NDF) rules by £10m to £25m.
Under the NDF rules, qualifying insurers do not have to follow the Solvency II regime and, as a result, benefit from lower compliance costs, simpler administrative requirements, and different reporting expectations and capital standards.
Captive Intelligence explored whether the NDF rules would be suitable for captives, but sources suggested the capital requirements would likely remain too onerous and not be sufficiently competitive with the likes of Bermuda and Guernsey.
The LMG believes, however, that the NDF regime is a good example of the PRA being able to apply different regulatory regimes when required and could set an example for the future captive regime to follow.