7 June 2021Law & regulation

Solvency II reform can establish London as a domicile for captives: LMG

The London Market Group (LMG) has called for policymakers to promote London as a centre for captive insurance companies, as part of a five point plan to develop the UK’s re/insurance industry.

LMG stressed the importance of increasing choice of buyers of insurance, and growing the market, by adapting the rules to make London a more attractive domicile for captive insurance companies.

More broadly, the LMG called for the development of a more proportionate approach to regulation that recognises the nature of the large complex risks covered in London, and the sophisticated corporate buyers the industry serves. It requested an international competitiveness duty for UK regulators, to ensure the London market retains its position as the most attractive jurisdiction for managing large risks, and for reform of the Solvency II regime.

Finally, LMG argued policymakers should promote London’s access to emerging markets, to help them build resilience against natural disasters and climate change events, through trade negotiations, regulatory dialogues and market promotion.

LMG noted the absence of captives in London, which has no specific regulatory framework for captives outside of Lloyd’s and treats them as it does other insurance companies. “There is no recognition within the UK’s regulatory system that captive insurers present a low risk to the overall financial system,” it said.

This means that UK-based institutions that own captives domicile them elsewhere. In the case of public sector organisations, it means UK taxpayer money is held offshore, LMG noted, a situation that could be reversed if the UK had an attractive regulatory regime for captives.

LMG said: “The potential of attracting captive business currently sitting offshore to the UK is significant. Marsh alone estimates that offshore domiciles currently account for 41 percent of its captive business, which in 2018 held total assets of more than $374 billion.”

A number of EU countries, including Ireland, Luxembourg and the Netherlands, interpret Solvency II in a more proportionate manner than the UK, LMG said, allowing captives to operate within those markets with lower costs than would be possible in London. The Central Bank of Ireland, for example, has adopted a “differentiated supervisory approach” for captives, reducing the number of regulatory requirements imposed on them if they qualify as captives under the definition provided within Solvency II.

LMG argued the UK should adopt a similar approach. “The current Solvency II review offers the UK an opportunity to develop a more attractive regime for captives,” it said.