7 June 2022ArticleAnalysis

An extra arrow in London’s insurance quiver?

London could be the next destination for captives—as long as the UK government and regulators strike while the regulatory iron is hot and make the most of current circumstances.Caroline Wagstaff, chief executive of the London Market Group (LMG), spoke to Captive International in the wake of LMG’s release of a five-point whitepaper aimed at bolstering London’s position in the world of captive insurance.Wagstaff said that when the LMG was writing the whitepaper it wanted to take a look at what London and the insurance market has to offer and what its clients want. The LMG knows risk managers and chief financial officers who are looking at the wide range of risk management needs, with a range of things they can use from retentions, captives, and buying insurance, to whatever else is out there.According to Wagstaff, the London Market wants to say: “We have all the tools in the toolkit that people would possibly want to use because we’re the world’s leading insurance and reinsurance market”. However, she points out, there are two areas where that was obviously not true.The first is insurance-linked securities (ILS)—five years ago the LMG worked to create an ILS regime in the UK—and the second is captive insurance.“Although theoretically under Solvency II you could create a captive in the UK, the problem is that the regulators treat you like a standard insurance company. If you say that to any captive manager, it is absolutely not going to fly,” Wagstaff pointed out.“We want the full range of products and services available. London has a wealth of captive experts within it and ironically there are a lot of people in the City of London who are advising people to set up their captive somewhere else, other than London. That seems a bit counterintuitive.”Worldwide there is a wide range of captive domiciles, many of which are well-established and highly effective. The LMG thinks that London should be an option for a certain type of company, particularly those that are UK-based and domiciled here for tax purposes.“Why, if the right environment can be created, would companies not consider bringing their captive back to London?” Wagstaff asked.

“There are a lot of people in the City of London who are advising people to set up their captive somewhere else, other than London.”

Caroline Wagstaff, London Market Group

Making the most of Solvency II reform
The LMG regards Solvency II reform as a good place to start. The Solvency II regime is clearly a part of the UK government’s post-Brexit legislative review—and the LMG has been told that everything in it is up for review.The LMG’s point is that Solvency II doesn’t exclude companies from having captives, because there are European countries that have Solvency II, and others that are Solvency II-equivalent, that have captive insurance regimes.However, Wagstaff said, the LMG needs to get the Prudential Regulation Authority (PRA) to think about captives differently.“We have had a number of very productive conversations with them over that, and they are very interested,” she said.“As with everything at the moment people are very resource-constrained, so we’ve said to the Treasury and the PRA that we will look at how big this market might be,” Wagstaff commented. “This might enable the Treasury to give some extra resources to the PRA to help it look at this. It’s not an unreasonable question: what is the size of the prize?“That might fall under several categories. As we know there are some UK government quasi-captives that might be a rich first seam, to think about if they might want to come back onshore,” she explained.“Again, that’s slightly counterintuitive as the Corporation of London has a captive that is not in London, so there are some things we could think about there. We’ve talked to captive managers and one story we hear a lot is about captive managers dealing with the reputational issue of their captives being offshore.“A number of people have said that even if this isn’t for tax reasons—we know it broadly isn’t, any more—the fact is that if your captive is offshore there sometimes comes a sort of reputational overlay that is positively not helpful.”

“We’re talking to the regulators about more proportionate regulation.”

Travelling for your captive
Wagstaff pointed out that for those already domiciled in the UK for tax purposes going to visit your captive on the other side of the world was not easy with a world in lockdown due to the global COVID-19 pandemic.Wagstaff said she had spoken to one captive manager who had to do a random day trip to a Berlin airport, because they had to be offshore to make an underwriting decision. As a result there are many reasons for the LMG to think that people might be willing to think about bringing their captives back to the UK, even establishing another one as the UK is a viable location.However, the key thing for the LMG is that everyone has stressed to it that you have to have the right regulatory framework—and that this is an absolutely essential point.For Wagstaff, the London Market not only has to get the regulations in the UK changed to make it viable, but the regulators have to believe they can understand the risks, that they can do it in the timeframe required and that they can deliver a competitive regulatory environment.According to the LMG it will have to be competitive in the sense that there’s no race to the bottom, but a situation in which when someone says: “Shall we put our captive in Guernsey, in Bermuda, or London?”, the answer shouldn’t be: “I’m not going to put it in London because it’ll take three times as long to get it through the regulators”.There is something of an issue about how captives are viewed, Wagstaff said. When the LMG started having conversations about this issue there was a misconception about captives and tax and it had to say: “Captives are really not about tax”.The LMG fully recognises that captive insurance is a highly specialised topic and if you’re going to talk about it to the government or a regulatory audience then you probably do need to explain about the risk profile and the way that they work.“That’s why we wrote the whitepaper. It has a lot of appendices about captives because we said: ‘let’s not assume that everyone will know about captives’,” Wagstaff explained.She admitted that the LMG will need to be pragmatic on timing due to the Financial Services and Markets Bill, which is scheduled to go through Parliament this summer. There’s a huge amount of legislative change going on, so the Treasury is very preoccupied by that. The legislation is being drafted and, Wagstaff said, the LMG hopes some of what it has been asking for will be in it.Given that the PRA has a full-time job doing its normal activities, the LMG is taking it one step at a time, or even one conversation at a time. The LMG is not expecting the PRA to be focusing on captives as there’s a lot on its plate, so persistence will be the LMG’s middle name on this.However, Wagstaff added, one of the things the LMG has been trying to highlight to the government is that it is very keen to find opportunities since the UK’s departure from the EU and as Wagstaff points out, the LMG thinks that this is the perfect Brexit opportunity.“There’s a change in legislation, which gives us the opportunity to get that right, we’re talking to the regulators about more proportionate regulation and captives are an enormous market,” she said.“We’re not saying that all of that market is going to come our way, but we also know that we’re in a part of the insurance cycle where the demand for captives and interest in captives is growing, whether that’s from the general hardening of prices or it’s because people are starting to look at captives for different types of risks they find difficult to find cover for.“The stars are coming together as a perfect time to look at this and add this extra arrow to the London Market’s quiver,” she concluded.