Regulation watch: the pros and cons of the captive domicile charge

The decision by the UK government to begin consultation on the creation of new regulations to establish a captive centre in London has highlighted the rapid expansion of these instruments as an ever increasing part of risk management programmes.

In a statement, the UK Treasury said: “With sustained interest from stakeholders and in the context of a rapidly growing global captives market, the Government wishes to understand the potential of a new approach to captives to support the growth and international competitiveness of the UK’s insurance sector.”

It added: “The Government has received representations from some parts of industry calling for a new approach for the regulation of captive insurance companies in the UK.

“It is argued this could support the growth of the UK insurance market and, by extension, the broader UK economy, by making the UK insurance market a more attractive hub for businesses seeking efficient risk solutions.”

With the consultation period due to end in February, the UK is set to join a number of European Union member states which already have or are well advanced in the creations of captive domiciles.

It comes against a backdrop of a significant growth in the use of captives by companies of varying sizes and managers and brokers say it is not only new captives being created but also risk managers using their existing structures to house new classes of risk.

Robert Geraghty, senior vice president, international sales leader, Marsh Captive Solutions, explained: “There is a lot going on in the market at present. We have seen huge growth, both in new set ups and the additional use of existing captives.”

He added: “We are also seeing risk managers using their captives to take higher retention in the insurance programmes. In the past four years we have been involved in the set up of 500 captives which is a phenomenal number in such a short space of time.”

On the UK’s consultation, Geraghty said: “It will provide another option for risk managers and it will certainly appeal to UK businesses to have the capability to set up a facility in Britain.

“However it will very much depend in whether the regulations are flexible, proportional and cost effective. We have also seen the kingdom of Saudi Arabia, India, and Italy look to establish captive capabilities and France has had a good deal of success having created the ability for captives to be sited domestically.

European risk management association FERMA has spoken of its desire to fully understand the way in which the new European captive centres have been structured and what it will mean for risk managers.

Speaking in Madrid, FERMA’s Captive Committee chair Laurent Nihoul said the association was keen to ensure that risk managers were aware of the pros and cons of the rise in new captive centres in the EU and beyond.

“There is a growing interest in captives, with formations in non-traditional captive domiciles, such as in France and Italy,” he said. “However, the benefits to EU captive owners of a growth in onshore domiciles have yet to be seen, and FERMA will be mindful to ensure there is healthy competition between domiciles rather than a zero-sum game.

He added FERMA is keeping a “watching brief” on the relative merits of new captive domiciles with respect to EU member states’ regulatory regimes, outside of the advantages of proximity, administration and tax requirements.

“The use cases for captives are expanding, with ESG and sustainability initiatives a key driver of interest in the vehicle as a source of customised insurance solutions,” Nihoul added. “FERMA will continue to work with numerous authorities and institutions to ensure regulatory changes do not negatively impact the appeal of captives in Europe.”

The association said it will continue to monitor the development of European captive domiciles, to assess the overall benefits of new domiciles against current regulatory regimes and the flexibility afforded by Freedom of Services rules.

“The Federation will explore the role captives can play in providing customised insurance solutions in areas such as environmental liability, climate change, and sustainability, where coverage is not freely available in the traditional insurance market,” Nihoul concluded.

Geraghty said he believes the pace of growth shows no signs of slowing into 2025.

“Last year we saw the gross written premium of the captive we are involved with rise by $3 billion to $73 billion, and that has not simply been driven by new start ups,” he said. “We have captives which now contain six classes of business. Risk managers are using captives for new types of risks including property, liability, excess liability, cyber, professional liability, D&O and some supply chain risks.”

“What has become clear is risk managers recognise the benefits of captive operation,” Geraghty added. “It allows risk managers to reduce costs, access new capacity and coverage, control reserving and reduce claims costs.

“Risk managers are using their captives to provide several layers within their programmes. Insurance still plays a part but captives are seen as an important piece in the risk management strategy.”

With insurance pricing starting to soften Geraghty said it was unlikely to see a drop in the attraction of captives.

“We have set up captives across soft markets,” he explained. “Captives are not just about premium cost savings. Greater control, capacity, and coverage are equally important. Growth will continue but it will not just be driven by new captive set ups.”