The captive sector has long been divided between onshore and offshore domiciles. In the last 20 years, the vast majority of new domiciles have been onshore in the US as states saw the success of the likes of Vermont, Hawaii and South Carolina and rushed to get a slice of the action with captive legislation, many of them very successfully such as Utah, North Carolina and Nevada.
In Europe, the situation has been slightly different. While there are many onshore domiciles, no new domiciles have appeared. There are established domiciles such as Luxembourg and Dublin, together with Sweden, Switzerland, Denmark and the Netherlands.
One of the advantages of onshore domiciles is that there are less requirements for the captive to be operated at arm’s length, providing greater parental control and involvement. But the downside it that where there is no specific captive legislation and captives are simply treated as insurance companies, there can be heavy regulation and much greater capital requirements.
Which is why there have been calls from many in some European countries for changes to allow the greater use of captives locally, with specific legislation and separate treatment of captives.
Marine Charbonnier, global programmes and captives regional director, Europe, AXA XL, explains: “Historic domiciles, such as Luxembourg, Ireland and Switzerland remain popular, but we are also seeing increased interest in onshore domiciles, at this stage mostly for new captives. In some countries, clients are responding to their risk management bodies having expressed a preference for captives’ governance to be more explicitly linked to the risk management of the parent company, and are thinking about domiciling their captive closer to home.”
A number of countries, including the UK, France and Italy, are at various stages of exploring or implementing domestic captive regimes, according to Lorraine Stack, managing director, Marsh Captive Solutions, international. “Increased choice of jurisdictions is always a good thing and the fact that more countries recognise the value of captives is a strong indicator of the positive perception of captives across the region,” she says.
However, she adds: “It will be interesting to see how successful these locations will be in developing a local captive industry, given the relative proximity of large captive domiciles with highly developed supporting services and players. It’s unlikely we will see existing captives moving with any speed to newer locations but certainly these will be important domiciles to consider for new captive formations of domestic companies.”
One of the first countries to look at a new domestic captive regime was France. The captive discussion was initiated last year and a final ruling was expected by the end of 2021. “Unfortunately, due to European constraints in the setup phase, it was not possible to achieve this deadline,” says Francoise Carli of Zakubo Consulting.
She explains that at the beginning of 2022, France was under strong political pressure due to the presidential re-election, and she says it was obvious to many stakeholders that the new captive scheme would not be back on the stage until the summer or autumn of 2022, when the presidential and parliamentary elections will be over.
“Should this reform be in place for year-end 2022, in the 2023 finance law, there are numerous potential new captives and redomiciled captives we can expect from very large groups and for specific high-risk industries, says Carli. “Studies are on hold but files are still open, waiting for the right signal. The process has gone too far to be cancelled now but the priorities have changed, and the economic situation may slow down the final steps.”
Another country looking at bringing in specific captive legislation is the UK, partly driven by perceived Brexit benefits. Caroline Wagstaff, CEO of the London Market Group, says it has started the conversation with government and the Prudential Regulation Authority (PRA), and those discussions are progressing. “There are a number of compelling reasons that the UK would be a really strong domicile proposition but we are not complacent [about the fact] that it is a challenge. The needs of captive owners in terms of regulatory understanding etc are very specific,” she says.
Wagstaff explains that for a captive regime to succeed in the UK, the PRA must work with government to create a new class of insurer – captives – and develop specific guidance for captives that focuses on reduced prudential risk assessments, a swifter approval process (30-60 days from application to licensing), reduced reporting requirements, lower capital requirements and a reliance on wider group functions such as auditing, etc.
“The most successful domiciles have a dedicated captive regulatory unit and while this may not be feasible from the start, the PRA should ensure sufficient capacity is available to respond to captive enquiries and applications in an expediated process,” she says.
Wagstaff says the UK government has shown itself “willing to engage on the issue, and we are working with them to understand the size of the prize”.
She adds: “A committed and proportionate regulatory regime is now the biggest factor in domicile selection for captive insurers. An ambitious regulatory model for captives, combining a proportionate risk-based solvency regime with London’s global reinsurance market, would make the UK a unique and attractive location for captives,” she says.
Wagstaff acknowledges that the captive sector is a mature market with some well-established and highly effective captive domiciles, but believes a UK captive domicile would offer an extensive financial services ecosystem, noting that it has London-based global brokers with extensive captive consulting experience, an unrivalled range of local banking and asset management options, and the world’s largest and most sophisticated reinsurance market.
“We would also expect UK companies to strongly consider a UK offer, given all the advantages it would bring to their operations. It should also be considered that the UK could bring back the public sector captives that are currently in offshore locations such as Guernsey and the Isle of Man,” says Wagstaff. “The scope for captives is also widening and many industries are adopting or expanding their use of captives, including healthcare, manufacturing, retail/wholesale, and communications, media, and technology.”
In a separate move, Lloyd’s has resurrected its captive plans from some years ago, although as Marsh’s Stack points out: “The Lloyd’s initiative is likely to be suitable for a limited number of large multinationals with global fronting requirements whose premium spend is in the tens of millions. This profile represents an important but relatively small number of captives in existence today.”