Government needs to bring in lighter regulatory regime to fill City’s specialist insurance market gap
The UK insurance industry has urged the Government to adopt a lighter regulatory regime for captive insurance companies to fill the gap in London’s specialist insurance market.
According to the Financial Times, London Market Group (LMG) research found lighter-touch regulations could see almost 700 captive insurers either moved onshore, from jurisdictions such as Guernsey and Bermuda or set up in the UK.
LMG’s research was published ahead of the expected UK Government consultation on introducing a captive insurance regime. The consultation is expected to begin in the first half of this year after Chancellor Jeremy Hunt announced the plan in his Autumn Statement.
Captive insurance is a form of self-insurance, whereby a company is created and wholly owned by those it insures. The idea behind it is that companies have control over the type of policies it needs, while also receiving coverage at a reduced cost compared to traditional insurance.
This type of insurance structure is extremely popular in the US, where Vermont has the highest number of captives domiciled. While in Europe, the market leaders are Guernsey, Luxembourg and Ireland. Globally, the captive insurance regime is usually found on offshore islands with Bermuda as the leader, followed by the Cayman Islands.
Speaking to the FT, Caroline Wagstaff, LMG’s chief noted UK captives could generate £153m of estimated economic value. While not a huge market, Wagstaff highlighted that opening up the market would fill the critical gap in the City’s specialist insurance market, benefitting the market in the long term.
Chris Lay, chief of Marsh McLennan UK said the government needed “to show how the UK will be as welcoming for new business as some of the more established captive domiciles.” He also told the FT that his clients had set up 400 new captives globally since 2020, in risks such as cyber and property catastrophe damage.
Speaking to CityAM, Lay said the current regulatory environment has prevented the UK from becoming a viable location for captive insurance vehicles.
“A positive outcome from the consultation – followed by successful implementation – presents a tremendous opportunity for the London insurance market and the City’s financial services sector,” he added.
This comes after Robert Chaplin, partner at US firm Skadden, Arps, Slate, Meagher & Flom argued in the FT today that London should be pushing for a Bermuda-on-Thames regime for its reinsurance industry.
He explained that while the UK Government is implementing Solvency II, he noted that this “regime is not designed around reinsurers.” He highlighted that “reinsurers under Solvency II are subject to the same complex and strict rules.”
He argued that the regime in Bermuda had worked well and acted as a huge magnet for business.
The Government announced back in November 2022 the first stage of reform to introduce the new regime of Solvency UK which would ditch some of the EU-era standards and tailor them for the UK market.
Last June, the Prudential Regulation Authority (PRA) made its first significant step toward the new regime so far when it published a set of proposals to streamline a number of areas within the Solvency II regime.