News & Views

Can the UK become a leading captive insurance domicile?

The UK government will shortly commence its long-awaited consultation into a UK captive insurance regime. For some time, the UK insurance industry has been calling for the government to promote the development of regulatory guidelines which will support the growth of UK-based captive insurance vehicles, following six years of steadily rising insurance premiums.

Currently, popular domiciles for Europe-based companies wishing to establish a captive insurance vehicle to insure their business risks are Guernsey (currently the leading European captive domicile), Malta, Gibraltar, Ireland, and the Isle of Man. Companies with an international reach tend to choose domiciles such as Bermuda, Vermont, or the Cayman Islands.

So, isn’t it about time the UK caught up?

The London Market Group (LMG), a body representing specialist insurance and reinsurance brokers and underwriters, has been working with HM Treasury for over a year in preparation for the formal government consultation. It has been gathering market intelligence to corroborate the view that the UK has the potential to be home to a captive regime rivalling those of the recognised jurisdictions.

Many professional firms and companies have already established captive insurance vehicles, including captive cells, enabling them to share in the underwriting risk and reward associated with their insurance program and to gain greater control over the management of their risks.

Captives form part of an organisation’s overall risk retention and risk transfer strategy. They are often used to insure unusual or emerging risks that might be prohibitively expensive or unavailable in the traditional insurance market. Without a captive solution, an organisation would need to retain capital on its balance sheet to hedge against the risk.

The lawyer’s role is to advise on the legal structure, regulatory issues and the contractual obligations governing the relationships between the captive owner, fronting insurers (where appropriate), captive vehicle, reinsurer, captive manager, and others.

To be competitive, the UK captive insurance domicile will need to legislate for cell facilities and adopt solvency rules that do not overburden captives. The Insurance Act 2015 provisions detailing good faith, disclosure and relevant knowledge requirements will continue to apply in connection with the policies written, any fronting arrangements and any reinsurance arrangements.

The Financial Conduct Authority (FCA) will be tasked with finalising the new regulations which will govern the entities, including rules on capital and reserve requirements. It is no secret that the FCA Handbook can be a challenge to interpret and the regulatory requirements which must be met by the commercial insurance market in the UK are deemed stringent. For the flexibility and creativity allowed by a captive structure to flourish and succeed, the FCA will need to adopt a different approach to their regulation and may look to offshore regulators such as the Guernsey Financial Services Commission (GFSC) for examples of best practice.

There are a number of captive managers within the large brokers who are already based in the UK and once the new regime is confirmed, there will be the opportunity for the independent captive management companies to establish a presence here. A captive manager will assist in setting up the captive (including conducting the initial feasibility studies, working alongside brokers to obtain suitable insurance support) and take charge of all operational duties for the lifetime of the captive. The captive owner enters into a legally binding agreement with the captive manager and there are usually quarterly board meetings which must be attended by one or more directors.

Changes to the global tax rules means that offshore domiciles do not offer the same tax breaks they once did, so the availability of an accessible captive regime in the heart of the world’s leading insurance centre will be attractive to many companies.

Can a UK captive regime rival the well-established and well-regarded jurisdictions? We certainly believe it can.

For further information, please email Kathryn Howard or Josh Bates or call 0151 906 1000.