The Isle of Man: captive of excellence
The Isle of Man has developed into one of the largest and most well respected offshore fi nancial centres by being both business-friendly and suitably regulated. As a self-governing Crown Dependency of the UK, the Isle of Man is a politically stable jurisdiction and, although not part of the UK, its foreign relations and defence are the responsibilities of the UK Government. The UK does not interfere in the Island’s domestic matters, but with its being only 35 miles from the mainland, the Island enjoys a close relationship while being autonomous, adding to its reputation. Part of the Island’s autonomy allows it to set its own tax regime, with insurance companies on the Island subject to income tax at a rate of 0 percent.
The Isle of Man has been on the Organisation for Economic Cooperation and Development’s (OECD) ‘white list’ of domiciles since the release of its recent assessments and is rated AA+ by Standard and Poor’s—the highest rating given to an offshore jurisdiction without its own currency. Being self-governing, the Isle of Man has its own legal system, Manx law. The Manx legal system is based on the principles of English common law and thus is well known and familiar to most international businesses.
The Insurance and Pensions Authority (IPA) is charged with the regulation of the insurance sector. The IPA is led by chief executive officer David Vick and supported by Francesca Signorio and Alan Rowe, heads of supervision for life and non-life insurance, respectively. The IPA prides itself on being a highly experienced supervisor that is approachable and responds swiftly to requests, enabling a swift turnaround on applications, for both new business and changes to existing arrangements.
"The Isle of Man has consistently stated that it is not seeking to change its regulatory system in order to qualify as a solvency II 'equivalent' jurisdiction."
Companies carrying out insurance business in or from the Isle of Man are required to be authorised under the Insurance Act 2008. The Act seeks to ensure that senior management and controlling parties of insurance businesses are fit and proper, and that the companies are financially sound. The Island’s effective regulatory regime makes it attractive to high quality business, and this has helped the Isle of Man to develop into one of the world’s leading centres for offshore life assurance and a major offshore captive centre. Despite soft market conditions and financial market volatility, the Island has continued to be successful at attracting new business, with total assets of £55.21 billion and annual premiums of £10.11 billion as at the end of 2010, representing year-onyear growth of 17 percent and 36 percent, respectively.
The IPA is committed to the continued development of an appropriate and up-to-date regulatory framework, and the Isle of Man was one of the first domiciles to introduce legislation allowing captive insurance companies from other territories to re-domicile to the Island without being liquidated in the original territory. This has led to considerable savings for those companies, in both time and cost. The IPA also introduced legislation to allow the formation of protected cell companies (PCCs) and incorporated cell companies (ICCs).
As the Isle of Man is outside the EU, it is not required to comply with the regulation proposed under Solvency II. Unlike other leading captive jurisdictions, the Isle of Man has consistently stated that it is not seeking to change its regulatory system in order to qualify as a Solvency II ‘equivalent’ jurisdiction.
Regulatory development in the Isle of Man is closely aligned with the guidance provided by the International Association of Insurance Supervisors (IAIS) and its core principles—a gold standard for insurance supervision. The IPA has created a regulatory framework for captive insurance which is robust and tailored to the size and complexity of insurance operations, while maintaining sufficient supervision to protect policyholder interests and the reputation of the Island.
The act, accompanying insurance regulations and guidance notes provide key principles (explained further below) which are the foundations of the regulatory framework rather than prescriptive rules. This allows the Isle of Man and its regulatory environment to remain nimble in the face of the changing needs of captive owners and able to address any new risk management techniques and products as they develop.
Under the regulations, a number of classes of licence are available:
• Classes 1 and 2: direct long-term insurance;
• Classes 3 to 9: direct general insurance;
• Class 10: long-term reinsurance;
• Class 11: general business reinsurance;
• Class 12: related party business.
Typically, captives fall into Classes 11 and 12. The guidance notes expand on the criteria required for a licence to be issued, such as incorporation of the company, the financial soundness of the entity and the fit and proper declarations of those associated with the application. All relevant documentation and information has to be provided in the IPA licence application, supported by a business plan.
The IPA clearly defines the extent that ‘mind and management’ and key functions of the insurance business must be based on the Island. These include:
• New business processing and the determination of terms;
• The acceptance and maintenance of all insurance contracts;
• The processing of claims and redemptions;
• Statutory reporting, financial and actuarial;
• The management and collection of premiums; and
• Bank account and cash control. It is common practice for captive insurers to utilise Isle of Man-based insurance managers who would undertake many of these activities.
The minimum requirement for paid-up share capital depends on the class of licence:
• Class 11: £100,000;
• Class 12: £50,000. This minimum capital requirement is supplemented by an initial capital requirement which is tailored to the applicant’s business plan and, often, driven by expected premium volumes.
The minimum capital requirement plus 10 percent of the supplement must be paid in cash and deposited with an authorised bank on the Isle of Man.
On an ongoing basis, a Class 12 captive would be required to maintain sufficient capital to meet its solvency margin of:
• Plus 10 percent of net premium written up to £2 million;
• Plus 5 percent of net premium in excess of £2 million.
While these figures are simple numeric guidelines, the overriding principle of the Island’s regulatory regime is that of ensuring that the captive has sufficient financial resources to support its business, both by way of its ability to pay its insurance obligations in full, and by allowing for projected expenditure and any investment losses.
Thanks to the IPA’s transparent guidelines, capital-efficient methods can be utilised under the Island’s regulations—subject to approval by the IPA—whereby admissible assets can include letters of credit, independent guarantees and related party loans, which together can be up to 100 percent admissible.
The Isle of Man operates a ‘Zero/10’ corporate income tax regime. Only income from banking activities and Isle of Man land and property is taxable—at 10 percent—with all other income streams taxable at 0 percent. As such, captive insurers located on the Island are subject to corporate income tax at 0 percent, with there being no requirement to withhold tax from the payment of dividends and interest, whether to residents or non-residents.
Although the Island’s tax regime, like all offshore jurisdictions, has been subject to scrutiny by the EU over the last couple of years, following a meeting of the EU Code of Conduct Group on Business Taxation in September 2011, the Island is now confident that its Zero/10 tax regime is robust and acceptable in the eyes of the code group. The Isle of Man is one of the first jurisdictions to have been successfully reviewed, with the group set to review Guernsey’s tax regime in January 2012.
The Isle of Man is effectively part of the UK for VAT purposes, with rates and exemptions being largely identical to those applied in the UK (the Island has its own VAT legislation and system of collection and administration, administered by the Isle of Man Customs and Excise). Generally, VAT expense in the Island’s captives is minimal as insurance management services, often the most significant operating expense, are VAT-exempt. Additionally, the Island does not impose any insurance premium tax or capital gains tax, making the Isle of Man a tax-efficient place to do insurance business.
Simon Nicholas is an associate director at KPMG LLC. He can be contacted at: email@example.com