UK to follow French lead as government consults on new captive regime

Chancellor seeks ‘establishment and growth’ of onshore captives

The UK risk and insurance management community received good news from its government this week, which announced plans to deliver a new captive-friendly onshore regime.

Chancellor of the Exchequer Jeremy Hunt said the government will consult on introducing a UK regime for captive insurance companies during his Autumn budget statement on 22 November.

“The government will consult on the design of a new framework for encouraging the establishment and growth of captive insurance companies in the UK. The consultation will launch in Spring 2024,” he said.

The UK initiative follows a similar move made in France to create a more captive-friendly environment. This has led to the relocation of captives from specialist domiciles and created a number of new onshore captives in the country.

The French and UK initiatives were partly sparked by the realisation of the need for more self-insurance and risk management options following the failure of the commercial insurance market to respond to business interruption caused by Covid-19 lockdowns.

Both governments appear to have woken up to the fact that captives are a valid and useful tool to boost business resilience, at a time of seemingly permanent crises placing ever-greater pressure on public and private budgets.

The rising threat in other key areas such as climate change and cyber-related exposures have added further impetus to the calls for greater flexibility and more captive-friendly rules, along with state backing for such risks through public private partnerships.

The London Market Group (LMG) – the body supported by the International Underwriting Association of London (IUA), Lloyd’s of London, the Lloyd’s Market Association (LMA) and the London & International Insurance Brokers’ Association (LIIBA) – has been working hard to lobby for a UK captive regime.

In mid-September, the LMG brought experts from across the global risk transfer value chain to meet with UK minister Andrew Griffith to consider the potential benefits of introducing new UK captive rules. This regime will now go out for consultation.

The event was attended by captive owners, brokers, insurers and the wider risk management community, including UK risk management association Airmic. It was the first time the UK government has convened market experts to listen to the benefits that a captive regime could bring to the UK.

Airmic CEO Julia Graham and the association’s captive ambassador Richard Cutcher, as well as several Airmic members that own captives, attended the event to share their thoughts on the benefits of captive insurance and what a good captive regulatory regime might look like.

Graham stressed that a proportionate and fit-for-purpose regulatory captive environment would need to be developed with clear guidance, have commitment from government, and need regulators that demonstrate they are prepared to back captives for the long term.

Graham said Airmic is looking forward to engaging further on the topic with the LMG and UK government.

Cutcher reiterated Airmic’s stance that any UK captive regime should be implemented outside of Solvency II so captives can be regulated on “a more proportionate basis”.

The creation of a UK captive framework was one of the key pillars of the LMG’s roadmap to improve risk transfer in the UK, and a part of its latest Plan for the Future.

And Caroline Wagstaff, CEO of the LMG, welcomed the UK government’s plans to consult on a captive regime.

“The London Market Group is delighted by the announcement today by the Treasury that it will consult on the creation of a UK captive regime by spring next year, taking on board the recommendations within our Plan for the Future. As the global centre for risk transfer, London needs to be able to offer all the tools in the toolkit, so this is a great step forward. We look forward to working closely with the government and regulators to ensure the UK remains a highly competitive insurance centre,” she said.

Wagstaff said back in September that despite being the global hub for risk transfer, the UK’s regulatory regime is not conducive to businesses setting up captive insurers.

“This is a rapidly growing global industry, with captive premium estimated to reach $161bn by 2030, and other jurisdictions – including France and more recently Italy – opening their doors. A UK captive domicile would offer participants an extensive financial services ecosystem: 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,” she said.

As the UK government commences its consultation, Lloyd’s is pushing ahead with its own effort to attract captives into the market. Lloyd’s has a global license system, specialty underwriting expertise, and the capacity and distribution network to offer big benefits for captive owners with global exposures.

Lloyd’s was previously host to just one captive but the recent rise in demand from risk and insurance managers globally has led the market to revisit the idea.

“We asked captive owners what they were looking for and they told us three things – cost, control and capital,” said Tom Allebone-Webb, head of strategy and innovation at Lloyd’s, during the recent European Captive Forum in Luxembourg.

“I ask you to consider the fact that you won’t need fronting capital in most cases, and where you do, you are working with A-rated companies,” he said. “Because of Lloyd’s unique licensing arrangements, it means you can write business out of London in most cases, save for China and the EU, so you can avoid dual-fronting arrangements.”

Lloyd’s has no captives as yet, but Allebone-Webb expects to announce the first new client early next year and is confident that more will follow. “A number of captives have been cautious about being the first captive syndicate but given that we expect the first one to be announced soon, I anticipate those fears will be eased and we will get over 100 captives,” said Allebone-Webb.

The French risk and insurance management association Amrae played a big role in persuading the French government to change its rules to make France a more captive-friendly location. It has created a dedicated captive association as a result, which was formally launched at the Captive Forum.

Alain Ronot, group risk and insurance director at CapGemini and Amrae committee member, explained that interest in captives in France is higher than ever. “Before the law, there were just ten captives in France; now there are 14 and we soon expect this number to be greater than 40,” said Ronot.

Solvency II has been a barrier to captive growth in Europe because it is generally accepted that national supervisors have failed to deliver the lighter touch proportionate treatment to captives that only write parent company risks.

Ferma and other bodies such as the European Captive Insurance and Reinsurance Owners’ Association (Eciroa) have fought long and hard to try to win this proportionate treatment since the capital adequacy and reporting regime was first introduced.

The good news is that this message appears to have been clearly heard, and the message from the European Insurance and Occupational Pensions Authority (Eiopa) is that proportionality will be more firmly enshrined within Solvency II when its current review is completed.

This will give a boost to other national risk and insurance management associations in Europe such as Anra in Italy, GVNW in Germany and Igrea in Spain to push their national supervisors and governments to follow the French and now UK leads on captives.

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