A separate regulatory regime could make the UK an attractive captive domicile

These comments came in the context of the government’s inquiry into its planned post-Brexit revision of Solvency II. Airmic submitted evidence to the inquiry by the House of Lords Industry and Regulators Committee looking at the future regulation of the UK’s commercial insurance and reinsurance market.

Airmic expressed its support for a new regulatory regime for captives in the UK but argued that “such an environment would only be appealing if it exists outside of Solvency II”. It cited the example of the successful bifurcated regulatory regime in Bermuda, the largest captive domicile in the world. Bermuda’s commercial insurance regulation has Solvency II equivalence, while its captive classes of insurer (Class 1, 2 and 3) remain governed by a separate risk-based framework.

The topic of proportional regulation to make the UK an attractive domicile for captives will be part of the discussion at the Airmic Captives Forum, a dedicated, full-day event taking place at Lloyd’s on 23 March. The Federation of European Risk Management Associations (FERMA) has also been pressing the European Commission to make proportionality a key element of its revisions to the European directive.

Members of Airmic currently make good use of captives in established jurisdictions around the world that tailor their solvency regimes and regulations to the unique profile of captives. Under Solvency II, this is currently very hard to do in the UK as proportionality is rarely and inconsistently applied. Airmic said in its submission: “A risk-based solvency regime would recognise that a captive insurer that writes only the first-party exposures of its parent is not a risk to the wider financial system or consumers.”

London insurance market view

The London Market Group (LMG) also told the House of Lords Committee that UK insurance regulation appropriate to the solvency risks of the insurer would benefit the competitiveness of the London market and the creation of captive insurers. 

The LMG believes that Solvency II, which the UK was instrumental in developing, should continue to be the basis of the UK’s insurance regulation, but that it should differentiate between different types of insurance undertakings and the type of supervision they need to protect the financial system and customers.

For the London market, the UK implementation of Solvency II has meant a disproportionate regulatory and compliance burden that raises costs and makes the UK less competitive, the LMG argued.