There are currently no UK-based captives, despite many UK public and private organisations using captive vehicles as part of their insurance programs. As Wagstaff noted, even public sector bodies such as Transport for London locate their captives offshore.
Instead, low tax and light-touch regulatory jurisdictions are typically the preferred locations for captives. They have also tended to hunker in offshore locations with established legal and financial services support platforms, such as Bermuda or the Cayman Islands.
However, there are signs the tide may be poised to turn with some captives considering relocating or “onshoring”. The potential prize is compelling – the global captive sector is $64bn+ in size, for example – so arguably it is no surprise that London is looking at the market.
London also has some undeniable virtues. It is a centre for (re)insurance excellence with all the accounting and intermediary support services that captives could require, together with a trusted legal regime and rule of law. It has a government which – in recent years – has shown a willingness to support the industry by making legal changes, such as to onshore ILS, in a bid to capture overseas business.
And it has in Lloyd’s – the near 350-year-old insurance market – an obvious potential platform to house captives. Indeed, the Society has already done some preparatory work with some tweaks thought necessary to the current syndicate structure to accommodate captives.
These attractions are undeniable but why are some captives considering onshoring in the first place?
One reason, experts suggest, is the growing prevalence of corporate ESG responsibilities, which is prompting organisations to re-examine all aspects of their business.
Locating a captive in an offshore jurisdiction where regulations may not be so robust now presents a potential reputation risk.
“We spend a lot of time talking to captive managers about what would persuade them to come to the UK,” Wagstaff said.
“They are increasingly concerned about the reputation of where they are located and the UK ticks a lot of boxes in that regard.”
Alongside regulations, there are also impending tax changes. From 2023, OECD countries are under pressure to implement a minimum 15 percent tax rate. Unsurprisingly, this is also prompting companies with captives to consider where is the most appropriate long-term base.
One, potentially critical, component to London’s appeal to the captive industry is how its regulators interpret and implement Solvency II capital requirements, something which is up for review following the UK’s exit from the EU.
As the LMG has noted, certain EU domiciles – such as Ireland, Luxembourg and the Netherlands – interpret their Solvency II requirements in a more proportionate way than UK regulatory authorities.
These jurisdictions interpret the governance and reporting requirements, roles and responsibility clauses enshrined within Solvency II more flexibily, increasing the agility of a captive to operate with lower capital costs.
By adopting a differentiated regulatory approach, the LMG believes the UK could develop a more attractive regime for captives.
“We know there is a great opportunity and we know the UK has something to offer,” Wagstaff said.
The regulatory review comes during a period of prolonged hard market conditions, which will typically increase the use of captives as businesses struggle to find the cover they need at a cost-efficient price in the open market.
Perhaps the hardest market conditions have been seen in cyber, a class of business where London already boosts strong expertise.
The LMG has estimated London currently accounts for ~25 percent of the cyber market.
The trend for cyber MGAs to launch captive units to retain some of the risk and align their interests with reinsurers has been highlighted in recent moves by the likes of Resilience, Cowbell Cyber and Coalition.
Given this trend, alongside London’s already strong position in cyber, the likelihood of hard market conditions being prolonged in the class, and the fact that much of the experienced global talent base in captive management sits within London market brokers, a few supervisory tweaks could enable London to become a much more attractive destination for captive (re)insurers. But will the regulators listen?
For continued access to market leading content click here to enquire about a subscription to The Insurer - your company may already have a corporate subscription in place...
Scan here to download the app