Europe is leaning into captive domicile opportunities

As European countries form and adapt captive insurance legislation, the risk management and insurance landscape is shifting. As the UK, France and Italy have increasingly adopted more robust and accommodating regulations for the captives industry, they have fostered innovation, economic growth and a competitive advantage in the global market.

A recent roundtable with captive insurance experts and the UK Economic Secretary to the Treasury and City Minister addressed the creation of a framework for the sector. Aimed at enhancing the attractiveness of the UK as a captive domicile, such a framework work would provide captives with a more robust legal environment and can ultimately foster economic growth.

The new legislation is expected to streamline regulatory processes, improve risk management, and offer tax benefits, thus creating a more favourable environment for companies looking to manage their insurance needs efficiently. This development reflects the government’s commitment to promoting economic resilience and innovation in the insurance industry.

By providing captives with a more robust legal environment, businesses are encouraged to set up and manage their insurance subsidiaries domestically.

The UK isn’t the only country seeing the value in expanding captive insurance legislation. France’s Ministry for the Economy, Finance and Industrial and Digital Sovereignty has brought in legislation to encourage captive insurance companies in the country. Meanwhile, Italian regulators have reached their own captive agreements, allowing Italian-owned captives to re-domesticate back to Italy.

New legislation contributing to domicile growth

These new legislative changes are major contributors to the dramatic increase in domiciles throughout Europe.

While not every government is pursuing captive legislation, many see the great potential. Currently, alternative risk is more than 50 percent of the market, with a big chunk of that being captives. As regulators look to build new businesses, a captive or domicile regulation serves as a great tool.

With the increase in options among European domiciles, companies with established captives might have reason to consider moving to a different domicile. One motivation may be adapting to changes in the company’s overall risk profile. Another might be onerous new restrictions or limits imposed by the current domicile.

In facing these issues, the conversation begins by taking a close look as to whether it is prudent to keep the captive in its current domicile, and if so, how best to address any additional requirements. The structure of the captive may have worked under the prior regulations, but will it maintain solvency while complying with the new rules?

For example, while a particular domicile may have been the ideal choice for a business seven years ago, the changing domicile landscape presents an opportunity. Maybe an uncomfortable share of the domicile’s exposures cover volatile regions of the world. Perhaps a legislative switch led to frustrating new restrictions. A company may not need to change its domicile every few years, but it does no harm to discern whether doing so might be advantageous.

As more domiciles recognise the potential of becoming home to captives, some will quickly become more aggressive in promoting their availability and offering advantages for choosing them.

Innovative insurance solutions

The formation of new domiciles and captive frameworks isn’t the only new opportunity within the European captives market. Regulators, businesses and captive managers are on the front end of innovation, from domicile setup and lines of business to captive structure.

More businesses are using captives in innovative ways, exploring their use due to troubles in existing markets, emerging risks, or simply understanding more of the benefits of a captive solution.

We are seeing more businesses explore captives for third-party risks to diversify the risks in a captive, meaning a loss is less likely to wipe out the capital. Environmental and cyber risks, specifically, have become a big piece of the puzzle, with employee benefits rounding out the risk profiles.

Additionally, pre-existing insurance companies and brokers are retaining customer risk through captives, enhancing the robustness of the captive. We are seeing many third-party risks being established in Guernsey, specifically.

The inevitable complexity of a growing marketplace enhances the value of experience and expertise when a company tackles this far-reaching decision.

What is the best way to navigate the choices? Whether exploring a new captive or desiring a significant change to an existing structure, the smart first step is turning to the experienced guidance of a captive advisor with proven approaches to guide the selection process and deep involvement in the current market.

A bigger marketplace needs trusted support

A bigger marketplace is usually better for buyers, and this is no exception. These opportunities sharpen the importance of due diligence in the selection of the domicile for a new captive. Companies indeed have more options, but few of those options are likely to be ideal for their specific needs. When conducting a strategic review of an existing captive or guiding a nascent captive through its formation, the process of identifying the ideal domicile is complex at best.

The better brokers understand all aspects of the captive insurance marketplace, the more responsive they can be in helping clients fulfil strategies. An example of the ways the most effective brokers deepen knowledge involves interacting with the Lloyd’s team to better grasp their sense of risk and specific areas of concern.

By sharing their impressions of regulations with Lloyd’s and enquiring as to the regulatory viability of potential strategies, brokers help their counterparts on the other side of the aisle draft rules that benefit both parties. More important, experienced brokers know exactly what regulators and other reviewers expect to see in documentation and reports.

Finally, regular reviews of every aspect of a captive are crucial, and that includes considering the continued suitability of the current domicile. Most businesses evolve and brokers may need to adjust coverages to ensure they reflect the ever-evolving exposures.

No matter where your company is in the captive insurance journey—novice or long-time user of the approach—an experienced partner will deliver counsel using practical advice and solid data to help you make decisions with complete confidence.

Alex Gedge is senior captive consultant, global captive solutions at Hylant. She can be contacted at: alex.gedge@hylant.com