Analysis: What will a world-class UK captive regime look like?

The UK has all the ingredients to become one of the best captive domiciles in the world, according to experts from across the industry – but getting the next phase of the process right is essential for realising the UK’s potential.

While Airmic, risk professionals and the UK insurance industry were quick to welcome the chancellor’s green light to establish an onshore captive regime, all agreed that the hard work starts now – and the details of the final legislation, planned for 2027, will be what ultimately shapes the UK’s future as a captive domicile.

The UK advantage

One of the UK’s biggest selling points as a captive regime is likely to be its location alongside the UK and London insurance markets – which together are widely regarded as being the largest and most advanced insurance sector in the world.

This will bring a range of advantages, including efficiency, says Airmic member Kevin Steed, head of group insurance at AstraZeneca:

“With the right captive framework, having all the key service components together – including captive manager, insurer/reinsurer, claims handlers, brokers, auditors, actuaries and banks – could create a unique selling point for the UK as a domicile of choice, enabling a highly efficient captive model.”

The UK is also the leading hub for commercial and specialty insurance, with the London Market alone placing 42% of global specialist risks each year. Chris Lay, UK CEO at Marsh McLennan, hopes the UK’s strength in innovation will spill into the UK’s captive culture:

“The London and UK insurance market has a ‘can-do mentality’ to risk,” he says. “We are not overly bound by rules and manuscripts; our expertise is in bespoke wordings, dealing with the unusual, and exploring alternative concepts like parametric.

“The UK can now put its mind to how captives can evolve in a similar way. Captives are an excellent vehicle for sharing risk for new and challenging problems and that’s an important step in innovation.”

Defining competitive

The UK Chancellor, Rachel Reeves, has committed to creating what she describes as a “genuinely competitive, bespoke captive insurance framework”. What this looks like in practice will determine the UK’s attractiveness on an international stage.

“Every risk manager will have a different view on what ‘competitive’ means for their risk profile,” says Steed. There are, however, certain prerequisites that must be in place to ensure that conducting captive business within the UK isn’t too onerous, he continues:

“Taking practical examples, speed of regulatory decisions and communications; minimal restrictions on what lines of risk the captive can write; having a solvency capital framework with proportionality; establishing sensible tax rates and sensible captive governance, will all be important.”

Lay agrees, saying proportionality will be the litmus test for competitiveness. “It needs to be light touch. That will mean less onerous capital and data requirements and speed of authorisation. We should be aiming to approve captives within three months.”

He is also calling for the new regime to have significant breadth of scope. “The government is open to including Protected Cell Companies which will be important for opening the UK to mid-market and smaller companies. We’d also like it to support a range of lines, like third party risk and employee benefits.”

With approximately 70 captive domiciles around the world and recent examples of successful onshore captive regimes in France, Italy and Canada, the UK has what Stephen Cross, head of innovation and strategy at McGill and Partners, describes as a “late-mover advantage”.

“There is so much tried and tested legislation around the world which is a great advantage. The UK government can use AI to compare all modern regimes and select the best elements of each one. But it’s crucial to also ask businesses what’s important to them – everyone will have specific requirements that will matter to them.”

To be truly world-class, the UK government must future-proof the legislation, he adds. “To really be the best regime in the world, they should be thinking about enabling legislation for the potential for joint venture vehicles. These are important when a real crisis emerges, like in the mid-80s when there was a complete crunch in directors and officers capacity.

“It might not happen for 20 or 30 years, but that sort of thing can happen, and captives are fantastic vehicles for corporates to create joint ventures and share their risk. Mutuals and risk sharing are very important.”

Encouraging signals from government

The government has agreed to “proceed at pace” in building the captive framework and will embark upon an industry-wide consultation next summer to inform the scope and details of the legislation. Airmic will be representing the views of its members in this process, by taking part in the government’s Sector Expert Groups.

Cross believes the government is making encouraging signals that it understands the need for competitiveness. “The tone from Rachel Reeves is very pro-business. In her Mansion House speech, she was using words like predictability, proportionality, growth-oriented and innovative. They seem to understand the need to tackle regulatory complexity which is really encouraging.”

Caroline Wagstaff, CEO of the London Market Group commented that the announcement of the consultation on protected cell companies is a positive sign: “This offers real choice for UK companies of all sizes in the use of captives and genuine differentiation. A clear timetable to delivery is also a real plus, it will help everyone to track progress and work at pace to deliver a world-beating regime”.  

Lay says he is also cautiously optimistic that the government is listening; however, achieving an agile approach will require a shift in culture at the regulatory level:

“I’m positive but we’re not declaring victory yet. We have suffered from regulatory burden and a risk-averse culture in the UK in the past so we will have to change mindsets.”

There are practical options available to improve the regime’s agility, he says. “For example, I would like to see consideration for establishing a dedicated sub-team within the PRA to manage captive approvals.”

First movers

The UK is likely to attract interest from a range of companies both domestically and internationally. There will be significant appeal to companies setting up captives for the first time, especially mid-market, third sector and not-for-profits.

However, Lay says there is also a sizeable level of interest from multinational companies with established captives. “I have been pleasantly surprised by the level of interest among larger FTSE 100 and FTSE 200 companies,” he adds.

Encouraging redomiciliation should be a priority for the government, believes Cross. “UK-headquartered companies would be one of my primary targets if I was Rachel Reeves looking for growth in a post-Brexit environment. Most UK-based companies would likely prefer to have a UK captive, but the legislation must make it easy for them to make the move.”

Steed believes that UK businesses will take a ‘wait-and-see’ approach. “Naturally, there will be operational and reputational benefits of a UK domiciled company operating a UK domiciled captive, but the framework needs to be fit for purpose. UK companies who already have a working captive are going to want to see evidence of the benefits before evaluating a captive redomicile.”  

Steed would like to see the wider captive ecosystem migrate onshore: “Whilst captive managers [from UK companies] will be UK-based, several of them have offshore centres of excellence.  As the UK captive volume increases, it would be great to see those centres of excellence coming back to the UK, reinforcing the vision of the UK being a leading captive domicile.”

Airmic CEO Julia Graham says that there is unlikely to be an immediate “avalanche” of established captives moving to the UK. “Captives are a long-term commitment. We expect the UK will receive a lot of interest from companies looking to establish captives for the first time, but Airmic members have long-held positions in some excellent captive regimes around the world and we don’t anticipate an immediate rush to change”.

The captive star is rising

Globally, interest in captives is on the rise, and the UK establishing a competitive regime will serve to accelerate the evolution of captives transitioning from an alternative to a mainstream risk financing tool.

“Captives are taking centre stage as part of the established and long-term risk financing strategies of many important commercial organisations,” comments Sean McGovern, chair of the London Market Group and CEO of AXA XL, who strongly welcomes the UK’s move to become a captive-friendly regime.

“It is a rapidly growing global industry, with captive premium estimated to reach US$161 billion by 2030, and other onshore jurisdictions – including France and more recently Italy, are opening their doors.”

These are exciting times for captives, agrees Graham. “Captives are now a mainstream part of an agile, intelligent and resilient risk financing strategy regardless of insurance market conditions.

“The use of captives for the incubation of emerging risks, blended catastrophe covers and sustainability projects is directly aligning the use of captives to the strategies of organisations in an increasingly connected, complex and fast-moving world.”

Having a diverse and competitive captive landscape, both in the UK and globally, is advantageous for risk professionals, Graham adds. “There are more quality domicile options available to Airmic members than ever before and each captive will have a different risk profile, business plan or ownership structure, which in turn will influence which domicile is appropriate.”

If the UK achieves its potential of becoming a world-class captive domicile, it will inject healthy competition into the international captive picture, says Lay. “A UK captive domicile will be complementary to other captive domiciles. Where there are elements of competition, that is only a good thing – it encourages innovation.

“But overall, I think having another high-quality captive regime in the UK will boost interest in captives generally, which will have a positive impact on all quality domiciles around the world.”