Monday, February 26, 2024

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Marsh calls for proportional UK captive regime outside of Solvency II

London’s world class (re)insurance infrastructure should give clients a great opportunity to utilise a “wonderful risk management tool” closer to home if the UK introduces a proportional captive regime, according to Chris Lay, CEO of Marsh McLennan UK.

Lay was speaking on the latest episode of the Global Captive Podcast, where he was joined by colleagues William Thomas-Ferrand, international captive practice leader at Marsh Captive Solutions, and Matthew Latham, alternative risk transfer leader at Marsh UK.



The trio explained why Marsh is backing the initiative driven by the London Market Group and why it is important any new captive regime is proportional and sits outside of Solvency II.

“That’s the starting point, irrespective of domicile, the wonderful risk management tool that it is,” Lay said.

“In the UK context, given the size of the UK insurance market, the amazing capabilities of the ecosystem we have here, it’s disappointing that we’re not using that, leveraging that for the benefit of clients.”

The CEO added that post Brexit and with the opportunity for the UK to do things differently, now should be a good time to capitalise on the rise in the popularity of captives.

“Captives are growing at a pace that we haven’t seen for some decades,” he said. “All of those things, for me, points an opportunity for the UK.”

Solvency II

Debating what would make a successful UK domicile, Thomas-Ferrand emphasised the importance of the regulator recognising captives are “a lower risk entity” and ensuring any new captive regime sits outside of Solvency II.

“The policyholder, the insured, it’s all effectively one person, one entity, and that has to be front of mind,” he explained.

“Once you’ve got through that and have regulation that embraces that, you then start talking to the other key factors. The speed of setup, the ability to innovate and to change regulation as things evolve.

“You need to have a certain amount of flexibility. The regulator needs to be accessible. That’s the huge benefit that established captive domiciles have brought.”

On Solvency II, which the London market and UK government is keen to diverge from and is set to be rebadged as Solvency UK, Thomas-Ferrand said it is one reason very few UK companies own captives in EU domiciles.

“Solvency II has been really challenging for captives in Europe,” he added. “I think you can tell that from the fact there aren’t that many UK-owned captives that are in Europe. They’ve preferred to be in the non-Solvency II domiciles.

“Capitalisation is important and capitalisation is particularly important in the beginning years of a captive. We’ve got to make sure that that’s achievable to get the first one successful.”

Latham stressed that the ongoing lobbying of the EU by the captive market on the continent to reform Solvency II for captives further emphasised the need to get “proportionality right in the UK”.

“That was a regulation that was designed for commercial insurance companies and to protect policyholders, but it was obviously then applied to captives where it wasn’t proportional and that has had some impact on captives operating there,” he said.

“[Captives] may be holding much more capital than they need to and that’s why it’s really important that we get that proportionality right in the UK.”

One of the oft-cited factors that could give the UK a unique position as a captive hub is its global (re)insurance market and the local infrastructure and expertise that could support the development of captive business.

Latham said this is one of the reasons a UK domicile could be an appealing option to international businesses, as well as domestic companies.

“There’s no shame in trying to replicate what works well elsewhere and capturing different things from different domiciles to try and make sure we have a very competitive domicile here in the UK,” he said.

“One of the obvious [factors] is the link to the established insurance market. London is a massive insurance centre. Captives will typically need fronting insurance and we’ve got all of the big fronting insurers here with established teams.

“You’ve also got reinsurance, not just on a traditional basis but also the alternative risk transfer market.

“That means that you might not see just UK companies being interested in the UK domicile. You might see overseas companies, multinational companies who buy their insurance through the London market, giving it a good look to see if the UK could work for them.”

Asked what his message to clients would be should the UK put in place an appropriate captive insurance regime, Lay concluded by reinforcing the message that captives are a “great risk management tool”.

“You want to look at everything that’s available to you to get to the optimum solution,” he added.

“So I’ll be saying to clients, here’s an opportunity to look at that tool and here’s an opportunity to look at it close to home, in your backyard with one of the best, if not the best, ecosystems in the world with the infrastructure. How good would that be?”