The first paving stone in the road to building a UK captive insurance regime was laid last week in page 99 of the Autumn Statement with the announcement that the government will consult on the design of a new framework to encourage the establishment and growth of captive insurance companies in the UK – a consultation set to launch in spring 2024.
The news was positively received by many quarters of the insurance industry, with Caroline Wagstaff, CEO of the London Market Group (LMG) hailing it as “a great step forward”. Sharing his reaction in an exclusive interview with Insurance Business UK, Chris Lay (pictured), CEO of Marsh McLennan in the UK, earmarked the announcement as an “ambitious move” that will be to the benefit of clients and the wider UK insurance industry alike.
“I’m excited because the launch of this consultation shows that the government sees the opportunity here,” he said. “I think it also signifies a broader recognition of the need to think differently about our regulatory environment in the UK and the opportunities that we have in a post-Brexit world and a world where we now have a secondary competitiveness and growth objective for the regulators alongside having good governance.”
A longstanding proponent of the development of a UK captive insurance regime, and who made it a primary focus of his recently completed presidency of the Insurance Institute of London, Lay highlighted how the UK could become a uniquely attractive location for captive investment globally. Because it has never been a domicile location for captives, he said, many people in the UK aren’t aware of the size and scale of the captive industry.
Offering a snapshot of the global captive market, he noted that in the last three years, it has grown at the fastest pace since its formation in the 1960s. According to Marsh’s 2023 Captive Landscape report, there are now approximately 7,000 captives in the world, with Marsh alone placing over $70 billion of premium into captives which have about $118.5 billion in surplus under management.
Marsh might be the leading player in the captive solutions business globally, he said, but it’s not the only player and the overall size of the market represents a significant opportunity for growth and diversification. And the captive market has seen explosive growth, with Marsh clients forming nearly 400 new captive entities in the past three years – 100 in 2020, 132 in 2021 and 138 in 2022.
Lay noted that businesses are looking to captive solutions to solve a range of issues; whether it’s lack of capacity, new and emerging risks, the need for better data analytics and better use of governance and compliance benefits, or simply to meet the challenges of a rapidly changing risk landscape when the insurance market isn’t able to respond at pace.
“So why would we, as the UK, let all of that happens somewhere else when we are the fourth largest insurance domestic market in the world and, as with all the expertise we have in London, the world’s largest wholesale market? It doesn’t make sense,” he said. “While historically [captives] might have been formed in historically lower tax locations, changes to the global tax regime has meant that the explosive growth in more recent years has been onshore – particularly onshore in the US but even more recently, we’re seeing that development onshore in France, Germany and so on.
“We've got a massive ecosystem and we've got British companies that presently have to go outside the UK to form their captive insurer, which is an integral part of their risk management toolkit. And if it was a dying industry, if it was in decline, if we didn’t have the capabilities, if British companies weren’t interested – I wouldn’t be talking about it. But I think we have a real opportunity here.”
And the opportunity at hand isn’t limited to the private sector, Lay said, as UK public sector organisations also have captives located outside the UK mainland. But with France making moves to establish a framework for a captive insurance regime, the pressure is on the UK to make sure it doesn’t get left behind. In order to prevent this from becoming a missed opportunity, however, the UK needs an ambitious regulatory model for captives, which combines a proportionate risk-based solvency regime with London’s global reinsurance market and the UK’s wider financial services ecosystem.
“Our governance, regulatory and compliance regime has tended to be a little bit ‘one-size-fits-all’ and hasn’t had the agility and the flexibility to deal with what is essentially an insurance company that is managing the risks of its parent in a formalised way,” he said. “[…] I think we just need to be much more pragmatic. And we need to overcome the problems we’ve had with speed and authorization and processing in our regulatory environment in order to enable this to work.”
Lay noted that the captive market is a growth industry with a massive role to play and it brings a great deal of value to clients and that the UK needs regulatory reform to enable that to happen locally. Top of the agenda needs to be the development of a proportionate regime on regulation and the development of a proportionate risk-based solvency regime. Our businesses are interested in managing risks and interested in financing risks, he said, and everything done to advance the world has risk attached.
Lay is keen to open up conversations across the insurance industry, regulators and the government and he believes that the upcoming consultation will be a chance to “kick the tires” of the potential for a UK captive insurance regime. It will be a chance to have critical discussions on what that will mean for the UK, how it will work and what its consequences might be. He paid warm tribute to the work done by the LMG to champion these discussions and noted that proponents of the regime will have their work cut out for them in the coming months.
“But we’re here to respond to clients, businesses, the public sector and broader society,” he said. “We’ll be working with them to identify the opportunities that they see first and foremost. We need to see where the demand is and how that demand is shaped to properly understand it and to be the voice of the client to the government and to the regulators. That’s so they understand that this is not a Marsh McLennan voice, or an LMG voice, but rather the voice of people who are trying to manage their financial risks – including public sector bodies themselves.
“[…] For me, I’ll keep banging the drum and supporting the industry drive, and I’ll be raising this at every opportunity with the Treasury, with the FCA, with the PRA – to help them work through any concerns they have and to understand any implications. I’m a big believer in pragmatism at speed. I don’t believe this needs to be an over-engineered conversation because there are some easy wins for us, and we need to focus on those first. And I’m not going to make any big, bold statements about economic growth or job creation because we don’t know exactly how it’s going to play out. But it can only be positive given the ecosystem we’re operating in. So, let’s get on with it.”