UK Positioned To Become a Captive Insurance Domicile with Proper Regulations

The United Kingdom is well placed to establish itself as a leading captive insurance domicile. 

That's according to industry insiders, who said that the country has all the right infrastructure in place and expect the new Labour Party government to make it one of its top priorities as it seeks to attract more business into the country.  

Indeed, the London Market Group (LMG) estimates that if companies reshored their captives, they could be worth £153 million to the United Kingdom, thus filling a critical gap in London's specialist insurance market. 

In order to achieve this, the UK insurance industry has urged ministers to adopt a light-touch regulatory regime. 

Caroline Wagstaff, CEO of the LMG, said that the growth potential for captives in the United Kingdom was significant. She added this was evidenced by the appetite for domestic businesses to have their captive closer to home, as in the case of countries such as France and Italy, who have both recently introduced new captive regimes—a desire that's shared by UK corporates and public sector bodies too. 

"All parties involved in the insurance and risk transfer industry in the United Kingdom (brokers, insurers, captive and risk managers) believe that with the right regulatory structures, the United Kingdom would be a popular jurisdiction given its extensive financial services ecosystem and expertise," said Ms. Wagstaff. "Establishing the United Kingdom as a captive domicile would strengthen the United Kingdom's position as a genuine world leader in risk transfer and would also mean that the United Kingdom could take advantage of a rapidly growing global market. It's a prize worth fighting for." 

Will Thomas-Ferrand, international practice leader at Marsh Captive Solutions, said that while the United Kingdom is one of the biggest users of captives, if businesses want to establish one, they have to go offshore because there isn't currently the legislation in place to do so in the United Kingdom. But he added that many were reluctant to do so, either because of the reputational perception of offshoring or the logistical challenge of doing so. 

"The United Kingdom could open up the market for captives dramatically if it has the right legislation in place," said Mr. Thomas-Ferrand. "The infrastructure is already in place—the regulation is the only piece that's missing."  

Regulation Is Key

The LMG estimates that if such regulations are introduced, it could result in almost 700 captives either moving onshore from jurisdictions such as Guernsey or Bermuda or set up in the United Kingdom. But, at present, the United Kingdom's regulation doesn't make it conducive to forming a captive there. 

Chris Lay, chief executive of the UK arm of Marsh McLennan, said the current regulatory regime was "preventing the United Kingdom from becoming a viable location for captive insurance vehicles." He added that the UK government needed to "show how the United Kingdom will be as welcoming for new business as some of the more established captive domiciles."

Peter Carter, head of captive and insurance management solutions at Willis Towers Watson, said that it remains to be seen whether the legislators can persuade the regulators, including the Financial Conduct Authority and the Prudential Regulation Authority, to change the existing Solvency II regime governing capital requirements sufficiently to make the United Kingdom an attractive domicile for first-party risks typically insured through a captive. He added that, currently, the United Kingdom's regulatory environment was viewed as relatively unappealing compared with other jurisdictions such as Guernsey and Bermuda. 

Ms. Wagstaff said that an approach that's designed and structured in a balanced and proportionate way will be key to the success of a UK captive regime. It's also imperative, she said, that the approval and supervisory regulatory processes are fit for purpose and match the timescales and user-friendly processes adopted by competitor jurisdictions. 

In last November's "Autumn Statement," former Chancellor Jeremy Hunt announced a planned consultation on a new framework for encouraging the establishment and growth of captives, and companies that want to set up captives in the United Kingdom have been lobbying the government hard. Currently, it's uncertain what the new administration's plans are, but experts are confident that the outcome will be favorable. 

Alex Gedge, senior captive consultant at Hylant Global Captives Services, has been working closely with the UK government, the regulator, and the LMG on the legislation and the form a new captive regime would take. She said the government has been largely supportive so far. But to fully embrace a new regime, she said they need to get comfortable with how it will work and have the right infrastructure to support it. 

"Obviously, the new administration has been a bit busy, and there have been other things that they have had to focus on more immediately, which has delayed progress slightly," said Ms. Gedge. "It's still very much a work in progress, but there seems to be a general consensus that everyone is broadly in agreement that it's a good idea and makes business sense."  

Mike Maglaras, principal of Michael Maglaras & Company, said, "Everything I know, read, and hear from my colleagues in London, who I'm in contact with on a daily basis, is of hope that the new Labour administration will be business-friendly and encouraging. Those who are following these developments are doing so very closely and choosing their time carefully to reintroduce captive legislation to the appropriate parties and the Treasury. 

"Now is the right time to do this, as the Prime Minister and his cabinet are currently re-examining literally everything to do with the way business is done in the United Kingdom on a daily basis."  

Ms. Wagstaff said, "A change of government has clearly slowed down the process, but the LMG is continuing to push this agenda item forward. We have engaged with the Labour Party on this issue while they were in opposition and are confident they support this direction of travel. 

"We have begun to re-engage ministers and civil servants on progressing the consultation around a UK captive regime, which is an important step forward. We remain hopeful that it's a matter of when, not if." 

Mr. Thomas-Ferrand said the first step to establishing a UK captive regime is to draw up a draft set of regulations that are put out for consultation before finalising the legislation. Given that many of the major captive managers and service providers already have a UK presence, it would then be relatively straightforward to establish a regime. 

Ms. Gedge said the United Kingdom needs to ensure it provides a robust regulatory and captive management regime that is pro-captive, is always available and open for discussion, responds quickly, and is engaged and keen to work with captive owners. It must also deliver best-in-class legislation and have a team of experts in place to support all this, she said. 

"If you're going to attract business from other domiciles through reshoring or encourage companies to set up their captives in the United Kingdom, you have got to give them a reason why they need to come here," said Ms. Gedge. "Many companies already have a presence or exposure in the United Kingdom, so it makes sense to have their captive here too, but it's also good for those that have more than one captive in other places to have a complementary one in the United Kingdom." 

Mr. Carter said that the United Kingdom needs to offer more competitive fees and a lower cost of setting up and operating a captive. It should also set up a fast track for captives to be established, with an easy to understand license application.  

The London Factor

The London insurance market currently employs 60,000 people, and it increased its contribution to the UK economy by 26 percent to almost £50 billion between 2020 and 2023. Yet, the UK government and the insurance industry are keenly aware of the need to diversify in a bid to attract new business in the wake of Brexit.  

The London market is one of the world's leading and most established and innovative specialty risk transfer and management centres. It has been at the cutting edge of new solutions, including, most notably, in June, the launch of the first "modern-era" captive syndicate by Apollo Syndicate Management at Lloyd's of London, enabling multinationals to streamline their ability to deliver insurance through Lloyd's acceptance of their captive. 

Reports also emerged in February that Google was in talks with Apollo and Lloyd's of London to establish a captive there. Other companies are also expected to follow suit. 

Mr. Carter said that the Lloyd's captive syndicates have the key advantage of providing access to global licenses with permissions in more than 80 countries. He added that they also enable both first- and third-party risks to be written while affording lower costs, as the global licenses remove the need for fronting partners as well as attracting the financial strength of the Lloyd's A/AA- rating, which can reduce collateral requirements. 

But Mr. Maglaras cautioned that while the captive syndicate model worked well for large and multinational companies, it wasn't suitable for every business. Rather, he said, a traditional single-parent captive may better meet others' needs, with the two structures being complementary to each other.  

Mr. Thomas-Ferrand said that the United Kingdom needs to focus first on the single-parent captives in order to achieve the volume required.  

"It's a huge market and area of opportunity for the United Kingdom," said Mr. Thomas-Ferrand. "If we get the legislation right to enable it, it will be a huge benefit to the United Kingdom." 

Mr. Maglaras said that the London insurance market had the key advantage of being a one-stop shop, where captive owners can form a captive in the domicile, are subject to its regulation, and can access any excess insurance capacity and reinsurance needed. It also makes it easier for them to attend annual general meetings and board meetings, visit their reinsurers, and make underwriting decisions, all in the same country where they're based. Additionally, it provides greater economies of scale due to a seamless working relationship between the parent and captive, he said. 

"This is critical for companies with varying risk needs and considerations in multiple different jurisdictions," said Mr. Maglaras. "The United Kingdom has the complete support system needed to form and run a captive, including the accounting, underwriting, and administrative talent." 

Establishing a captive regime in the United Kingdom will also create new jobs and investment. It will also provide new underwriting and claims management opportunities for insurers. 

Mr. Carter said that one of the biggest stumbling blocks to the United Kingdom establishing itself as a captive domicile was the fact that Brexit has introduced complexity when dealing with cross-border insurance operations. As passporting into the European Economic Area is no longer possible for a UK-based captive due to Brexit, he said that it's more suited to a reinsurance captive business model than a multicountry direct writer. 

Mr. Maglaras said that the biggest challenge for the United Kingdom will be to distinguish itself from the many other competing jurisdictions in order to attract business to its shores. That requires drawing up a robust regulatory regime that is business-friendly, he said. 

"The United Kingdom needs to be prepared to turn on a dime if it wants to attract international business in the form of captives to its marketplace," said Mr. Maglaras. "If it's able to do that, then I see no reason why it can't establish itself as a leading one-stop shop as a global captive domicile." 

Ms. Wagstaff added, "Clearly, the government has a lot on its plate right now, but given the clear financial benefits of a well-functioning captive regime to the city and the UK economy, we do anticipate that over the next 12 months, we will see progress on the introduction of a UK regime."