A dynamic captive market is expanding choice for risk managers and enabling fronting insurers to better meet the needs of clients, according to Joshua Nyaberi, Head of Captive Fronting, Zurich Commercial Insurance.

The captive insurance environment has witnessed spectacular growth in recent years, driven by insurance market conditions and an increased profile of risk management.

The number of captives worldwide increased yet again in 2024, with captives now accounting for almost a quarter of the global commercial insurance market, according to EY. Captive owners continue to expand the scope of their captives, while new captive and cell formations are robust, with increased demand from emerging markets and mid-sized companies.

Responsive regulation

Growth is also a reflection of the vibrant and evolving regulatory environment, which has seen the emergence of several new domiciles. France, for example, implemented new captive-friendly tax and accounting rules in 2023, while the UK government recently announced it will move ahead with proposals to establish a dedicated captive regime. There are calls for Italy and Spain to follow suit.

At the same time, established domiciles are adapting their frameworks to remain competitive, as well as to better meet the needs of captive owners. Many of these changes aim to reduce the burden of compliance and costs – as well as speed up processes associated with captive formation and operation. Regulatory changes have also sought to align domiciles with global tax, accounting and insurance regulatory standards (Bermuda, for example, recently introduced a 15% corporate income tax, while Malta allows captives to opt out from the application of IFRS 17 in favor of the local standard GAPEE (General Accounting Principles in respect of certain Eligible Entities related to the business of Insurance) .

It is in the interest of captive domiciles to be responsive to captive owners and other outside stakeholders, explains Sandy Bigglestone, Deputy Commissioner of the Captive Insurance Division of the Vermont Department of Financial Regulation.

“We have had 44 years to perfect our processes and procedures as a regulatory body, but we always consider ways in which we can improve upon them, without compromising good, proven standards… Regulated entities find value in the transparency and accountability of good regulation,” she says.

The Malta Financial Services Authority (MFSA), which regulates the EU-based captive domicile of Malta, also strives to understand the needs of the captive sector, according to Ian Edward Stafrace, Chief Strategy Officer at Atlas Insurance PCC Ltd.

“The MFSA has recognized the increasing complexity and competitiveness of the global captive market and has significantly invested in its supervisory capacity, including technology upgrades and increased staffing, to enhance robustness, responsiveness and shorten application timelines,” he says.

Innovation in PCCs

Recent regulatory changes have also sought to foster innovation. One of the most important innovations in the captive space has been the development of the protected cell company (PCC) concept. Recent years have seen PCC formation outpace single parent captive formations, indicating a growing appeal among mid-size companies that often opt for these flexible capital-light and cost-efficient legal structures.

Over time, domiciles have made changes that make PCCs more attractive. Vermont, for example, implemented its PCC legislation over 20 years ago, with cells initially limited to insurance companies.

“As Vermont became more experienced with protected cell business, updates to protected cell laws were introduced to allow other organizations to be qualified as sponsors.  Subsequently, additional legislative amendments were introduced and passed by Vermont lawmakers for protected cells, to continue to modernize legislation,” says Bigglestone.

Malta has also made changes to streamline the transfer of cells from one PCC to another, as well as the conversion of a cell into a standalone entity, explains Stafrace.

“This adaptability is crucial. It allows cells to serve as learning opportunities for risk managers and business owners, enabling them to trial new strategies within a cost-effective PCC structure before deciding whether to establish a fully standalone entity,” he says.

Weighing-up your options  

All these developments are good news for risk managers. For prospective captive owners, they mean simplified and efficient approval processes, while those with established captives can expect less burdensome compliance processes.

However, no one domicile is like another. Captive domiciles significantly differ in terms of capital requirements, operational flexibility, regulatory frameworks, cost and fees (Malta, for example, is the only PCC domicile that provides direct access to the EU Single Market). So when selecting a home for their captive, risk managers will need to balance each domicile’s regulatory, tax and operational frameworks with their organization’s risk appetite and business needs.

Domiciles also vary in their approaches to certain risks or structures. Some explicitly allow particular risk coverages that others either do not, or are silent about: Several domiciles, for example, have taken a flexible approach to directors and officers insurance, enabling some captives to provide Side A coverage, including non-indemnification claims (currently only Delaware explicitly allows this).

Think flexible and adaptable 

Typically a captive is established with a narrow set of risks in mind, but needs are likely to evolve over time, so a domicile that facilitates changes will be a better fit in the long term. For example, as companies seek to get closer to their customers, they may look to offer affinity programs and embedded insurance, risks that are increasingly being retained by companies through a captive. Therefore, a domicile that enables a captive to write third party risks would align better to an owners’ needs.

“Prospective captive owners should seek to understand, post-licensing, how the domicile regulator will handle changes in the captive insurance company’s plan of operations. This is important should a captive owners need to make future amendments in its lines of business, request a dividend, or engage in something more innovative, for example,” says Bigglestone.

Risk managers evaluating a domicile should consider factors beyond regulatory compliance, including responsiveness and the proportionate application of regulations, advises Stafrace.

“One key consideration is the strategic fit with long-term corporate objectives. Flexibility to accommodate related affinity business can provide added strategic value. Ease of setup and cost-efficiency also play a pivotal role, especially for organizations exploring such risk financing or insurance revenue streams for the first time. A supportive, collaborative environment can make a meaningful difference in enabling risk managers and business owners to launch and scale their insurance structures with confidence,” he says.

Transformative force for captive fronting

We see the proliferation and modernization of captive jurisdictions as a catalyst not a challenge. As jurisdictions compete through streamlined licensing, digital infrastructure and innovative structures, fronting insurers gain additional tools to deliver value.

Here is why jurisdiction innovation and diversity matter:

• Enhanced risk transfer agility: New and modernized jurisdictions expand the feasibility and flexibility of captive solutions. Fronting insurers can now structure programs for emerging risks relying on jurisdictional specialties. This agility can turn challenging exposures into opportunities.
• Future-proofing fronting relevance: As captives evolve into strategic risk hubs, fronting insurers leveraging innovative jurisdictions can be enablers of enterprise resilience.
• Operational efficiency: Digital onboarding, automated compliance and faster licensing reduce overhead and overall program costs. Reduced administration means quicker program launches and competitive pricing – which increases the appeal of captive programs and strengthens fronting partnerships.

In a world increasingly faced with new and emerging risks, the value of captives will only increase. We see many new and exciting opportunities to work with risk managers and captive managers to create solutions that are faster, leaner, and more responsive to their needs.