Treasury holds roundtable to consider UK captive proposals

Proposals to create UK captive legislation are moving forward with a meeting between industry representatives and HM Treasury, the London Market Group (LMG) has told Commercial Risk Europe.

Over the past two years, the LMG has drafted proposals to create an onshore captive regime in the UK under the group’s broader plans to bolster the insurance market’s competitiveness. These proposals will hopefully now progress after the UK Treasury agreed to hold a captive roundtable in London today, according to Caroline Wagstaff, chief executive officer of the LMG.

The roundtable brought together everybody in the value chain – from the captive managers and brokers to fronting insurers and captive owners – to talk to the Economic Secretary as to why this is a good idea, Wagstaff told CRE

“Broadly the government is on board, but they want to get everybody around the table and kick the tyres,” she said.

The agreement to hold a roundtable is encouraging, and could pave the way for a joint working group to formalise dialogue and implement the proposals, according to Wagstaff.

“We need the treasury to get behind this, as there needs to be secondary legislative changes. You also need political buy-in to make these things happen, and the economic secretary has been supportive. And we need the Prudential Regulation Authority (PRA) at the table and agree they will regulate it proportionately. Hopefully this is what we will see from the roundtable,” said Wagstaff.

The hard insurance market, which is driving growth in captives, and the UK’s post-Brexit regulatory environment, present an opportunity to create an attractive UK captive regime, according to Wagstaff. With the recent passing of the Financial Services Markets Bill, the government appears more receptive to a proposal for a UK captive regime, she told Commercial Risk Europe.

“We are trying to provide a UK-based captive alternative for companies that think that will be useful. In a growing captive market, choice can’t be a bad thing for captive owners,” said Wagstaff.

The LMG proposals, with technical support from UK risk and insurance manager association Airmic, are quite advanced. “We have already carried out a lot of work for the treasury, including a recommendation on what a first-class captive regime would look like. We have taken legal advice on the type of legislation required and carried out an economic impact study of a UK captive regime,” said Wagstaff.

The LMG proposals would see legislation that allow a new class of captive insurer, created and regulated outside the Solvency II regime. The LMG has urged the government to develop specific guidance for captives that focuses on reduced prudential risk assessments, a swifter approval process, reduced reporting requirements, lower capital requirements and reliance on wider group functions, such as auditing.

It also called for the implementation of an ‘equalisation reserve’ provision and no additional premium taxes outside of the insurance premium tax (IPT) already imposed on insurance procurement.

A successful UK captive regime, however, would require the active engagement of the PRA. according to Wagstaff.

“You must have the right regulatory behaviour. The UK’s Financial Services Markets Bill introduced for the regulators a secondary objective that said they must consider the growth and competitiveness of the UK when making decisions. We believe the introduction of a UK captive regime would be a great way for the PRA to live that objective in a way that is supportive of the market,” she said.

The LMG sees an opportunity to redomicile a significant amount of captive business, creating jobs and returning capital to the UK. Fifty-seven percent of captives are domiciled in the same country as their parent, while several large UK public sector bodies – including TfL, Corporation of London, Network Rail, and the Nuclear Decommissioning Authority – have captives that are based overseas.

Initially, the regime would focus on reinsurance captives and captives writing only their own group risks, which represent a low risk to the wider financial system. While a UK captive market would appeal to UK corporations and public sector organisations, it could also have appeal for international companies looking for a captive domicile, Wagstaff believes.

“It goes back to why London is attractive for international businesses. Time zone, language, regulation, law etc. All these things are attractive for a captive owner, plus you have the London insurance market, a hotbed of commercial insurance and captive expertise,” she said.

According to Wagstaff, the captive proposal has broad support among the insurance and risk management communities.

“We have been talking with the broking and underwriting community about this for a year, and everybody thinks it is a good idea. If London is to be the leading global risk transfer market, you need to be able to offer all the tools in the tool kit to your risk management clients. At the moment, [a UK captive solution] is a risk transfer tool that London cannot offer. Making sure we have the widest possible offering is an important thing to do,” she said.

UK-based risk managers that have spoken with LMG on this issue are also supportive, according Wagstaff. “I have not spoken to anyone that does not thinks this is a good idea. Most risk managers want a flexible and robust captive regulatory regime, and would often like it closer to their home operations, due to economies of scale and reputational considerations,” she said.