Located in the Irish sea, the Isle of Man is home to a big captive insurance market,
with new insurance legislation on the cards, industry experts discuss how these as well as current trends and challenges are currently impacting its captive market
With a population of 83,000 people, the Isle of Man is a self-governing British crown dependency in the Irish Sea located between the north of England and Northern Ireland.
With a strong economy, the Isle of Man is backed by a Moody’s rating of Aa2. Although it is located in the heart of the British Isles, it is not part of the EU or the European economic area and retains its internal self-government.
The Isle of Man is also home to 102 captive insurance companies, as of 31 December 2019. The captive market was first established in 1986 and offers a variety of structures including limited liability companies, protected cell companies, incorporated cell companies, insurance special purpose vehicles and limited liability partnerships.
In 2019, the island licensed two new captives and saw three closures. Industry participants discuss the new regulatory framework, current trends and what’s to come in the future for the domicile’s captive market.
Regulatory roadmap
The Isle of Man Financial Services Authority Regulatory Roadmap was first issued in June 2013 to provide an overview of a significant update to the Isle of Man’s insurance regulatory framework which is consistent with the authority’s aims of ensuring that the island has a proportionate and robust regime for the regulation and supervision of insurance business, consistent with the International Association of Insurance Supervisors’ - Insurance Core Principles (published November 2019) to deliver a dual regulatory regime tailored to the needs of both captive and commercial insurers.
The authority has now issued the February 2020 Roadmap which provides regulated entities and other relevant stakeholders with information on progress over the past six months and looks ahead to significant workstreams over the next year.
The Isle of Man Financial Services Authority is due to launch a limited consultation in Q2 this year, in respect of capital requirements for protected cell companies (PCCs) and incorporated cell companies.
The new framework is anticipated to be in place for the captive insurance market on 31 December 2020.
Nick Gale, head of office, Marsh Management Services Isle of Man of Marsh Captive Solutions, reveals the key changes that will affect captive (re)insurers (Class 12 licence holders) include a new risk-based solvency capital regime based on an insurer’s individual risk profile; and an updated Corporate Governance Code (CGC) of practice for insurers.
He notes that the CGC will include several possible exemptions for Class 12 (captive) insurers.
Ross Dennett, managing director at Thomas Miller Captive Management, adds: “Importantly in the process, the authority has not only undertaken extensiveconsultation but it has also worked closely with Isle of Man Captive Association to ensure that the enhanced legislation is both relevant and appropriate.”
Gale clarifies that Marsh has been working closely with the island’s financial services authority over the last few years in order to address the needs of the captive sector and plan for the implementation of the new regulations.
As a result, Marsh doesn’t expect any of its client companies that they manage to require additional capital or find the new governance requirements unduly difficult to comply with.
On regulation, Gale also noted that the Isle of Man income tax division has implemented new substance requirements for resident companies, including captive insurance companies.
Gale says: “While these requirements are new, they have been largely practised by the Isle of Man captive industry for decades and therefore are not expected to have much impact,” he adds.
Hardening market
On the current trends, Dennett addresses the significance of the hardening of the conventional insurance and reinsurance market over the last year.
Dennett suggests that the hardening market has been a catalyst for a marked increase in business enquiries.
He explains that insurance purchasers are either faced with significant premium increases, reduced cover or in some cases are not able to source any cover at all from the insurance market.
“Capacity has reduced and insurers are clearly in a position where they can be a lot more selective over which risks and lines of business they choose to underwrite.”
“Naturally, this scenario has focused minds on increased risk retention by purchasers and the logical home for such risk retention being a captive insurer,” he continues.
Dennett points out that the general view is that this trend is long overdue as the pricing within the insurance market had reduced to sub-economic levels, meaning the island – along with the rest of the market – should expect a lot of interest and enquiries in the pipeline.
According to Gale, the captive insurance sector continues to be the bedrock of the island’s non-life insurance sector.
Gale adds that Marsh is seeing an increase in enquiries and new insurance licence applications.
He says: “In addition, a number of existing captives are considering self- insuring more of their own risk, which is largely due to the challenges some insurance buyers are experiencing in the commercial market. Where cover is not available or is not cost-effective, companies are looking to utilise an existing captive or set-up a new captive vehicle to self-insure the risk.”
Looking at it from a Marsh perspective, Gale adds they have seen increased interest in protected cell companies (PCC) over the last 12 months. Recently, Marsh’s Mangrove Insurance Solutions PCC facility in the Isle of Man established two new cells and they expect to form another two shortly.
PCC legislation
A law governing PCC’s was first enacted in 2004 on the island, which was known as the Isle of Man Protected Cell Companies Act (IOMPCCA), which was solely for their insurance industry. However, due to its potential to protect other industries, numerous business groups lobbied the government to expand the law. The act was amended in 2006 permitting aPCCtobeusedforanytypeof business. Additionally, the Protected Cell Companies (Eligibility) Regulations were created in 2010.
Dennett outlines that the Isle of Man “has always had a reputation as a ‘can-do’ captive domicile with a high sovereign rating and its standing as an internationally responsible country as acknowledged by the International Monetary Fund (IMF) and other regulatory bodies”.
He explains that this is because a protected cell vehicle can allow a smaller company to isolate risk without incurring the expense of actually owning a captive.
A PCC can be designed to accommodate a quick entrance or exit. In addition to cost savings, a PCC can free up management time and offer both capital flexibility and acceptance. It can be thought of as being a standard limited company that has been separated into legally distinct portions or cells.
“The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole”, he continues.
He notes that a PCC can provide a means of entry into the captive insurance market to entities as it was previously uneconomic. The overheads of a PCC can be shared between the owners of each of the cells, making the captive cheaper to run from the point of view of the insured. The professional infrastructure on the island is well established, but according to Dennett, one of the attractions of the Isle of Man is that the finance sector is really quite broad.
He comments: “Both the Isle of Man government and the Isle of Man Financial Services Authority recognise the importance of the captive sector and PCC’s are an important tool.”
Brexit impact
Although the Isle of Man is not part of the UK or the EU, it does have a close relationship with the UK.
Dennett states that with Brexit things will change and the scope of that change will take shape this year as the future relationship between the UK and EU is negotiated.
He explains: “For people and businesses in the Isle of Man the effects of these changes may be significant, or they may be minimal. The Isle of Man Government has, therefore, been preparing for the UK’s withdrawal from the EU for some time. This has meant making sure that our laws have been changed to reflect the ending of our limited relationship with the EU, and also that government services can continue to be delivered.”
He highlights that businesses and people have been provided with relevant information to ensure that they can also take the steps necessary to prepare for Brexit.
Island challenges
With ever-changing technological advances, comes the pressure to stay up-to-date with the latest innovations and trends.
Gale explains that the new insurance regulations and recent Moneyval plenary results are important steps in the right direction.
However, Gale adds that continued focus is required for the captive sector to adopt new and disruptive technologies that change the way the businesses operate and their client’s needs for insurance.
He suggests that shifting social attitudes and political priorities are also likely to present new challenges and opportunities that must be understood and regulated appropriately.
“Sticking the right balance of timely and safe innovation and maintaining the island’s strong reputation for reliability will be important to the island’s ongoing success”, he adds.
Looking at the competition, Gale points out that the number of potential captive domiciles grows almost every year so the Isle of Man “must continue to differentiate itself” to stay relevant”.
Gale comments: “The Isle of Man Captive Association plans to actively promote the island’s non-life sector in 2020 through various media channels to make sure its benefits and reputation don’t just rely on word of mouth and the knowledge of key industry experts.”
Planning ahead
For the rest of 2020, Gale believes that the outlook is “positive”, due to the transitioning insurance market, which should lead to increased captive utilisation.
He adds that with the association actively promoting the island as a captive domicile and an alternative solution to commercial insurance, “the island will see its fair share of new formations and growth”.
Although we are currently three months into 2020, Dennett reveals that this year has already been “very exciting” for the islands captive sector.
He notes that there have been “a lot of new captive enquiries coupled with existing captive owners looking to ‘work’ their existing captive more”.
Dennett adds that he is also positive that the new regulatory framework will be finalised and formalised and the strong indications of the long-overdue hard market will all help grow the island’s captive sector.
