The ascent of the Man
It was exciting times in March this year when the Isle of Man introduced Insurance Special Purpose Vehicle (ISPV) legislation. This bespoke legislation now allows the Isle of Man to fully compete in the insurance-linked securities (ILS), catastrophe bond and collateralised reinsurance space.
The use of alternative risk capital has increased dramatically over the past 24 months and is set to continue as investors seek to diversify their asset classes and move away from a benign interest rate environment.
Aon Benfield’s Insurance-Linked Securities First Quarter 2015 Update revealed that catastrophe bond issuance for the period reached a record high.
The Isle of Man is well placed to take advantage of this growth and provides an attractive solution which ensures speed to market within a transparent and easily understandable regulatory framework. The legislation was developed and enacted in response to requests from a number of commercial insurers who were seeking a credible jurisdiction this side of the Atlantic.
A number of new enquiries are currently being handled including a sidecar for an Asian insurer and a number of life-related transactions. Given the scale of the Isle of Man’s extensive life sector, it is hardly surprising that the majority of interest to date is related to life assurance.
Challenges to the captive sector
Although the growth and opportunity in the ILS market is exciting, this is countered by some of the challenges facing the captive sector. These include increasing regulation, whether this be in the form of Solvency 2, the International Association of Insurance Supervisors (IAIS) Insurance Core Principles or Solvency Asset and Management (South Africa). These are just some of the factors which captive or potential captive owners need to consider when deliberating whether to set up a captive and where to locate it.
Introduction of Diverted Profits Tax in the UK, coupled with the UK hike in insurance premium tax (effective 1st November 2015) produces increased frictional costs.
"INCREASED CAPTIVE UTILISATION IS EVIDENCED BY GROWTH IN GROSS WRITTEN PREMIUM WITH CAPTIVE OWNERS LOOKING TOWARDS THEIR CAPTIVES TO PROVIDE GREATER VALUE BEYOND THE TRADITIONAL PROPERTY AND LIABILITY COVERS."
Despite the prolonged soft insurance market, which indirectly impacts new captive formations, there are reassuring signs of growth in certain regions with Asia-Pacific showing a steady increase in the number of corporates which have taken a decision to form a captive.
The Isle of Man is not directly affected by Solvency II, which is effective from January 1, 2016, given that it is outside of the EU/EEA. There has been a suggestion that fronting costs may have to increase, but discussions with major global insurers have confirmed that this is not the case as they will not be subject to an additional capital charge if a fully cash-backed Letter of Credit is in place, thereby collateralising the captive’s obligation. In addition, there is usually a significant relationship between the captive owner and insurer whereby fronting costs are just one element of a much larger discussion.
It is worth noting that for all general classes of insurance business, with the exception of statutory covers, eg, motor third party and employer’s liability, it is permissible for an Isle of Man captive to issue a policy directly into the UK and a number of other territories.
The captive insurance market continues to be extremely competitive and this is exacerbated by an increasing number of jurisdictions introducing captive insurance legislation against a backdrop of fairly static captive growth. Notwithstanding this, the Isle of Man captive sector has undergone a revival and has enjoyed a substantial increase in the number of new captive formations, which is largely attributable to its competitive regulatory framework, speed to market and reputation for good governance.
Increased captive utilisation is evidenced by growth in gross written premium with captive owners looking towards their captives to provide greater value beyond the traditional property and liability covers. Noted below are a couple of examples of where we have seen captives extend their portfolios over recent months:
Employee benefits (EB) have long since been heralded as a growth area for captives, but historically in Europe much of this was hype, with growth in this area being largely attributable to the US. One of the key obstacles to growth was the division of responsibilities, with the EB function traditionally being administered by the human resources team rather than the risk management/insurance resource.
It’s not surprising, however, that risk managers and finance directors are catching on, with savings on insurance premiums of up to 25 percent coupled with the benefit of improvement in cash flow and increased flexibility in policy design.
Areas of EB which we have seen recently introduced into captive portfolios are medical stop loss, personal accident and disability, group life, and critical illness, to name but a few. There are a couple of examples of major corporates utilising their captive as a pension financing tool, in order to reduce running costs, maximise investment returns and the potential to de-risk via an external reinsurer.
With the rapid pace of technological innovation and data growth, cyber risk is an important issue for the C-suite. In Aon’s 2015 Global Risk Management Survey, cyber risk entered, for the first time, the cited top 10 risks facing companies. We have experience of corporates looking to their captive for a variety of cyber solutions including underwriting the substantial deductible under their risk transfer policy; providing a policy which effectively writes back the exclusions of market cyber policy and utilising the captive as an incubator vehicle. We predict that the number of captives underwriting cyber risks will increase exponentially over the coming years.
The propensity for captives to become involved in the more esoteric risks is set to continue and this, coupled with the challenges presented by increasingly complex regulatory requirements, will drive innovation. We can look forward to an interesting few years.
Should you wish to know more about insurance in the Isle of Man, please contact: John.Garland@gov.im