Sunday, April 21, 2024

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Ideal timing for UK’s captive market entrance

Christopher Lay is CEO of Marsh McLennan UK and was previously president of Marsh Captive Solutions 2014 – 2016.
William Thomas-Ferrand is International Practice Leader at Marsh Captive Solutions.
Matthew Latham is Alternative Risk Transfer Leader at Marsh UK.

In an exclusive interview with Captive Intelligence Christopher Lay, CEO of Marsh McLennan UK, William Thomas-Ferrand, International Practice Leader at Marsh Captive Solutions, and Matthew Latham, Alternative Risk Transfer Leader at Marsh UK, explain why they are backing the London Market Group’s captive initiative.

Chris, Will and Matt explain why now is the right time for the development of a UK captive domicile, while emphasising any new regime should “walk before running” to ensure simplification and early success.

What is Marsh’s position on the UK captive initiative, and why are you supportive of its development?

Marsh embraces and supports the proposals of the London Market Group and along with our clients we are keenly putting forward recommendations as part of the consultation.

Increased utilisation of captives is trending for our clients; bringing innovation, alternatives, and agility to the risk management sphere for their benefit. Our clients need captives more than ever before and one reputational and logistical barrier is that captives cannot currently be set up within the UK environment.

The UK is a highly developed risk management marketplace but this regulatory barrier has prevented companies from utilising captives to their full extent. The UK is also a region where there is a considerable middle market and smaller size potential for captives to be set up – which is virtually impossible in the UK under current Solvency II rules that are designed for larger commercial insurers.

Why now?

The risks that commercial organisations and other entities such as charities/ authorities/universities are facing are changing at an increasingly fast pace and the commercial market sometimes finds it challenging to react, particularly in critical areas such as cyber or property catastrophe risk.

This, combined with the widespread adoption of captives as an option to deal with these challenges in other regions and the opportunities provided by Brexit to adjust regulatory regimes, means that the timing is ideal for the UK to enter this growing market.  Simply put, captives are a powerful tool that can promote innovation.

You have colleagues working on this from across brokerage, alternative risk and of course captive solutions, while Marsh McLennan UK CEO Chris Lay is also publicly backing it. Why such broad engagement, when this is predominantly a captive matter?

At Marsh McLennan we look at the holistic benefit to our clients from any marketplace developments. Captives are beneficial for managing retentions, accessing alternative reinsurance, and for innovative solutions including employee benefits and pensions.

As such, a captive does not just impact Marsh’s relationships with our clients, it frequently encompasses Mercer and Guy Carpenter too. Our team of experts who are helping with this initiative are therefore representing our clients from all perspectives – broking, reinsurance, employee benefits, and of course captive management and alternative risk solutions.

What do you think the key ingredients of a UK captive framework will need to be, for it to be successful and attractive?

In short, speed, consistency, and confidence.

The challenges associated with establishing a new domicile often lie in the early stages. A successful domicile requires a number of things, 1) Proof of an advantage compared to existing locations and 2) Provision of straightforward, fast, and cost-effective regulation and servicing from the outset, thereby reducing the barriers to entry.

Our belief is that that while the UK captive regulatory regime may develop further in the future, especially given the huge and innovative market that is present in London, the early stage should be marked by simple captives which test the regulatory regime and service infrastructure to deliver a satisfactory outcome for the parent in a timely manner.

This may to some extent replace retentions which are currently held on the balance sheet of corporates (with little or no regulation). This will also help corporates comply with advancing ESG initiatives by formalising their retentions.

In other words, the key success ingredient of the future UK captive regime will be to “walk before running” and to be willing to increase scale/complexity and potential uses as the reputation of a UK captive framework grows.

Once the reputation is established and simpler cases are working well, the framework can expand to encompass more of the sophisticated uses that the UK has pioneered in the insurance world. 

Do you expect the main appeal to be to UK corporates or, because of the reputation and infrastructure of the London market, could a UK captive regime be attractive to multinational businesses headquartered elsewhere?

Initially we think the UK captive market should focus on UK based corporates and other UK based entities.

There may be expansion beyond this in future – especially if Solvency II continues to restrict captive formation in Europe, but the UK needs to walk before it can run.

In general for onshore captives, corporates use captives to insure risk that is overseen in the region that the captive is present in – US captives focus on US risk, European captives focus on European risk…. It is a logical conclusion that UK captives would at least initially focus on risks that flow into a UK parent entity, although some of these may be multinational in nature.

There is always the potential that corporates with multiple captives (for different regions) could consolidate these risks into one of their chosen captives in due course.

What kind of competition do you expect the UK to provide to existing captive domiciles, particularly those that are commonly used by UK corporates?

We believe that while there may be elements of competition to established domiciles such as Guernsey, Bermuda and Isle of Man, this should be seen as a positive development – Is not imitation a sign of success?

In the longer term we anticipate that captives will become easier to form and maintain through this legislation and similarly to the US there will be a greater proportion of corporates using captives compared to now. This will lead to increased captive growth and utilisation. Competition and transparency are key to driving overall growth.

Captives remain in a domicile because they are successfully run in that location, and they have developed an excellent and efficient operating structure and business/regulatory relationships.

It is unlikely that an established and well operated captive will move from one domicile to another unless there is dissatisfaction. One possible point of dissatisfaction is being associated with an “offshore tax” regime.

However, the OECD tax implementation of a base line tax across many traditional captive jurisdictions is levelling the playing field in this regard in a very public way.

Up until now CFC rules and offshore captives electing to pay onshore tax have largely been a precursor to this anyway – but have not necessarily removed the “perception”.  

How do you see the potential UK captive regime tying into or complimenting the Lloyd’s Captive Syndicate initiative?  Do you think they are targeting different use cases?

We see this initiative as complementary to the Lloyd’s initiative. The Lloyd’s initiative will suit certain clients, who in particular can benefit from being part of the Lloyd’s infrastructure.

In general, the Lloyd’s syndicate initiative may apply to some of the larger, more complex and multinational/global captives that may seek substantial reinsurance. At least at first, the UK captive regime should focus on the simpler, more straightforward use cases.