Hopes high for UK captive regime despite election delays

Airmic and industry players have told Commercial Risk that they remain hopeful for UK captive legislation despite delays to a consultation because of the election and a potential new government.

The London Market Group (LMG) proposed a domestic UK captive regime in 2022 as part of a five-point plan to bolster the London insurance market. Following a Treasury-hosted industry roundtable event in September last year, the government agreed to launch a consultation on the design of a new regime this spring. But that has now been delayed by the upcoming general election.

“At present, we are awaiting the launch of a consultation from HMT on creating a captives regime, which was due to be launched in the coming weeks. However, with the announcement of a General Election and purdah requirements for the civil service, this has now been placed on hold,” Caroline Wagstaff, chief executive of the LMG, told Commercial Risk as UK risk managament association Airmic met for its annual conference in Edinburgh this week.

The election campaign will “significantly delay progress” on the captives regime, according to Wagstaff. However, within six weeks of a new government being formed, the LMG intends to “re-engage” with civil servants on progressing the consultation, she explained.

“The advanced stage of preparation before the General Election and support in principle from both parties for the creation of a captives regime would, we hope, mean that the consultation is still on the table,” she said.

“In the meantime, the industry needs to continue to build the case and support for a captives regime by seeking examples of businesses that might consider relocating their existing captives to the UK, and to make the case to regulators for proportional regulatory supervision of captives,” she added.

Airmic president Julia Graham is also hopeful that the captive plans will not fall by the wayside and that things will be delayed rather than abandoned.

“A big issue is the change of government and what that will mean for the things we have been lobbying for on the creation of the UK as a captive domicile. We don’t know yet what that effect might be. It is not going to stop us pushing alongside people like the London Market Group to see this come to fruition. We have to be realistic that an election means that politicians will take their eyes off this ball but we remain optimistic. However, there will be a diversion,” she told Commercial Risk Europe.

“Our hope is it is more about a delay rather than it not happening, as it should be an issue that is party agnostic,” added Graham.

Robert Geraghty, SVP and international sales and consulting leader for Marsh Captive Solutions, is also optimistic that the proposed UK captive regime will regain momentum after the General Election. “It was moving at a good pace and everyone was proactively behind it. Whichever way the election works out, hopefully the good momentum we have will continue,” he said.

Geraghty believes that the UK can build on the success of France, which is attracting new captives onshore, having changed its captive legislation just over a year ago. Italy and Saudi Arabia are also looking at potentially establishing frameworks for onshore captives, he noted.

“There are a lot of countries globally looking at this and, as an insurance centre, why would the UK not be looking to offer a captive solution? We have such a great system in place. We already have the London insurance market and the whole ecosystem of service providers in place, and we have the fronters in place. With such a group there already, why not offer clients and companies from the UK the potential to set up a captive here and not have to locate somewhere else?” said Geraghty.

A change in regulation could allow UK-domiciled captives to benefit from significantly reduced capital and regulatory requirements compared to standalone insurance companies, according to Peter Carter, head of captive and insurance management solutions at WTW. The ability to hold board meetings and make underwriting decisions in the UK would also be advantageous for captive owners, he said.

However, the UK would face stiff competition from established offshore domiciles, Carter said. Guernsey, Bermuda and the Isle of Man are already popular locations for UK-owned captive insurance companies.

“While there are good reasons for companies to consider the UK, it’s essential not to take their interest for granted. The current regulatory environment needs to be comparable to other territories to attract captives. There are 300 plus captives already established in mature domiciles in the Channel Islands of the UK, with proportionate capital requirements and running costs. The case for change would need to be compelling if a switch in location is to happen,” he said.

Light touch UK captive regulations could bring around 700 captives onshore, delivering £153m of economic value to the country, according to the LMG. However, the potential size of any future UK captive market would depend on the details in any proposed regime, said Carter. For example, whether UK captives can write third-party risks and statutory lines in addition to first-party risks. The cost of application may also be a factor, as will minimum capital requirements and the preferred subscribed capital model, he added.

“The key will be how UK regulation will differ to Solvency II… and whether that difference is attractive enough to entice captive owners to redomicile, or stir those new to captive ownership into action toward setting one up,” said Carter.

Richard Tee, director at captive manager Davies, said where there is a will there is a way, but questions whether there is sufficient interest within the Prudential Regulatory Authority and Financial Conduct Authority to make any plan work. “Feedback from discussions to date implies the regulator would find it difficult to operate a ‘captive lite’ model,” he said.

Tee believes the minimum premium required to make a UK captive work could be considerably higher than offshore captives, which may limit any new scheme’s attractiveness to a few large players.

“If you already have a successful offshore captive, you would have to have some very persuasive reasons to go through the process to form a UK captive and transfer your business across to it. It would seem it would require a client with a large insurance spend who hasn’t already set up a captive. There are, however, some quasi-public bodies for whom being ‘onshore’ would be a must, and a UK captive solves a problem,” he said.

There is interest in a UK captive solution among UK companies, which are the second-largest group of captive owners in the world behind the US, according to Marsh.

“It is important how the legislation is drafted, how it is followed through, and how proactive it is. These companies would carry out an assessment as to whether it’s the right move for them – to come back or set up a new one. They are interested, but it all depends on how it plays out,” said Geraghty.

“It must be competitive. If you have a company already set up in another jurisdiction, they will look at the cost benefit of moving back to their home territory. So it has to be competitive with other domiciles,” he said.

A successful future UK captive regime would need to be “fair and proportionate” for captives, said Geraghty. Successful captive domiciles also tend to have a pro-active regulator that is innovative and willing to work with captives, he added.

“At the moment, a captive coming to the UK would be treated the same as a commercial insurer and that will not work for captives. You need a proportionate [solvency] model that is fair to clients that are mostly just taking their own risk,” Geraghty said.