Airmic interested in a UK captive regime but not under Solvency II

Airmic has told Commercial Risk Europe that it supports moves to introduce an onshore captive regime in the UK but sees no appetite among its members for such a regime under Solvency II. The UK is one of the most saturated captive markets in the world in terms of owners, although it does not currently have specific captive legislation or regulation. UK companies favour offshore domiciles like Guernsey, Isle of Man and Bermuda. However, recent months have seen growing interest in onshore captives from companies in Europe. Several EU countries – including Luxembourg, Ireland, Sweden and France – already provide special regulatory treatment for captives. France recently implemented more favourable captive legislation following lobbying by the country’s risk management association AMRAE. Lobbying efforts for similar changes are now underway in Italy and Spain. “Anything that promotes captives to a wider audience is a positive for the market,” said Richard Cutcher, Airmic’s captive ambassador. “The major domiciles are dominant in the market for a good reason but there will always be companies more comfortable being at home than in a foreign domicile. There is potentially less reputational risk, and closer governance and control,” he said. However, there is little appetite among UK companies to lobby for similar captive legislation in the UK under a Solvency II-type regime, explained Cutcher. Guernsey and Isle of Man are regulated outside Solvency II, which treats captives in much the same way as a commercial insurer. But the UK could potentially follow the Bermuda model, which applies a Solvency II equivalent regime for insurance companies while its captive industry is subject to non-Solvency II equivalent rules, explained Cutcher. Post-Brexit, the UK is currently developing its own capital and risk management regime, known as Solvency UK, which opens the door to separate treatment for captives. “If the UK can introduce a captive regime that is competitive and comparable to Guernsey and the Isle of Man in terms of regulation, it will be an interesting option for Airmic members. A captive regime that is just another Solvency II regime will not be relevant to our members that have Guernsey and Isle of Man on their doorstep,” he said. Airmic does, however, support efforts of the London Market Group (LMG) that put forward proposals last year to HM Treasury and the PRA for a new class of insurer. The proposals would see specific guidance for captive insurers in the UK that would include reduced prudential risk assessments and a faster approval process, alongside reduced reporting and capital requirements. “Airmic is not currently lobbying for captive legislation, however it does support the LMG proposals in principle. If the government takes up the LMG proposals as they currently stand, it would be a good regime,” said Cutcher, who helped draft the proposal. While the UK does not have specific captive insurance legislation, Lloyd’s is developing a captive syndicate offering, which enables international companies and their captive insurers to use Lloyd’s global licences and market infrastructure to issue policies. Lloyd’s is reportedly working with companies interested in establishing a captive syndicate. “Our members have been watching Lloyd’s efforts to introduce a captive syndicate, and LMG proposals to introduce captive legislation in the UK. Airmic has fed into that, although we are not actively lobbying for it. Airmic members are well served by Guernsey and the Isle of Man options, as well as other domiciles such as Bermuda, Dublin and Luxembourg,” said Cutcher. The hard commercial insurance market has helped “rejuvenate” the captive sector, which had faced headwinds with the soft market, Solvency II and the OECD’s tax avoidance initiative BEPs, according to Cutcher. “If the market stays hard, we will continue to see captives being formed. Market hardening has been the primary driver for captive formations out of the UK, mostly into Guernsey, but also the Isle of Man. I know of at least five members that have formed a new captive or cell in the past year, and I am aware of a similar number of feasibility studies happening now as well,” Cutcher said. Airmic has seen an uptick in interest in captives from UK companies during the hard market. “The theme of the last three or four years has been more engagement within Airmic and the Captive Special Interest Group on the topic of captives. We see interest from members that already have captives and that are utilising them more in the hard market, or that are looking at more insurance and reinsurance options. We also have members that do not have captives but are being forced to think about it in the hard market,” said Cutcher. In addition to the hard insurance market, the growing maturity of corporate risk management is supporting captive growth, he explained. “As the risk and insurance functions matures, the captive conversation becomes more feasible. The hard market has given fresh energy to captives and the more companies use their captives, they tend not to go backwards from that. The more premium that goes into a captive, the more it is likely to stay there,” Cutcher said. “Over time, if they run the captive well and grow surplus, they can either return capital to the parent through a dividend or use that capital to write more risk and new lines of business. We are already seeing more cyber written by captives, and higher retentions written by captives,” he added.

Airmic interested in a UK captive regime but not under Solvency II

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