The Isle of Man Captive Association’s Ross Dennett discusses why the delay to the domicile’s insurance regulation updates will allow more time for enhanced quality of implementation
What does the current captive market look like in the IOM?
The significant hardening of the conventional insurance and reinsurance market over the last two years — 2020 most specifically — has been the catalyst for a marked increase in business enquiries across most captive domiciles. Insurance purchasers have either faced premium increases (in certain cases 400 per cent), reduced cover or worst case have not been able to source any cover at all from the insurance market. The hardest-hit areas in the market have been the financial lines and consequently, we have seen a lot of interest in captives writing group professional indemnity risks. Across the board, capacity has reduced and insurers are clearly in a position where they can be 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, or an element of it, is a captive insurer. The general view is that this trend is long overdue as the pricing within the insurance market had reduced to sub-economic levels. So, there is a huge amount of interest and several enquiries in the pipeline.
What trends can we expect of the IOM’s captive market this year?
We expect to see a continuation of increased momentum of what we saw last year. Both prospective and existing captive owners, due to the reasons above, will seek to optimise on the use and value of their captives. Increased retentions, helping to fill coverage gaps and placements gaps that might exist higher up on the insurance placement where traditionally pricing has been very low and now insurers and reinsurers are not prepared to expose their capital unless pricing radically changes.
There is a strong view that the significant hardening of the conventional insurance and reinsurance market will not be followed by the typical cycle whereby an influx of capacity creates over supply resulting in price competition and ultimately a soft market.
We are certainly seeing new market entrants with fresh capital, however, we believe that the market is addressing a long overdue pricing issue. In some lines, the pricing in 2019 was 50 per cent of what it was 10 years ago.
That is clearly not sustainable, particularly with interest rates being flat for the last 10 years.
Historically, insurers might have taken a view that they have longer tail exposures and by the time they pay out on claims the investment income earned is material and therefore can be factored into the pricing, however that is no longer the case. Insurers also have stronger balance sheets now, which can only be a good thing for buyers and the settlement of claims. On the broking side, there has been major consolidation among the big firms (Marsh/JLT and the Aon/Willis Towers Watson announcement).
The Isle of Man Financial Services Authority was due to launch a limited consultation in Q2 of 2020 around capital requirements for protected cell companies and incorporated cell companies. Is there any update on this?
The Isle of Man Financial Services Authority has decided to postpone implementation of the new framework to 30 June 2021 because the updates to the insurance regulations have taken longer than anticipated, reflecting the complexity of updating and revising the existing suite of regulations.
The authority, quite rightly, took the decision to delay the implementation dates for the non-life risk-based capital requirements, the insurance regulations (including Class 12 definition and reporting requirements) and the corporate governance code for non-commercial non-life insurers from 31 December 2020 to 30 June 2021. There is significant overlap between the risk-based capital requirements, the insurance regulations and the corporate governance code for non-life insurers, hence the decision to adopt a consistent implementation date.
The revised implementation dates allow stakeholders more time to consider the final frameworks before launch and for regulated entities to better ensure the quality of implementation.
What opportunities will it provide to the market?
In June 2013, the authority published its roadmap for updating the Isle of Man’s regulatory framework for insurance business. The roadmap introduced a project with the objective of implementing a framework for the regulation and supervision of insurers, insurance managers and general insurance intermediaries that would establish a high level of observance in respect of the updated and revised insurance core principles issued by the International Association of Insurance Supervisors, while remaining appropriate and proportionate to the risks of the different parts of the insurance industry that operate in and from the Isle of Man. The culmination of this project consolidates various legacy versions and amendments into one simpler set and most importantly introduces a risk-based capital and solvency regime that is relevant, fit for purpose and appropriate. This will help to ensure the best use of capital in the management of risk.
What impact will Brexit have on the IOM’s market?
The UK is now fully out of the EU following the completion of the transition period. On 24 December, both sides agreed on a trade deal, although it largely overlooks the provision of services, we anticipate there will be further wrangling on this issue in the years to come. When the UK left the EU, the Isle of Man’s limited relationship with the EU (as set out in Protocol 3 to the UK’s Treaty of Accession) fell — although it has continued to have legal effect, during the transition period, which ended 31 December 2020.
Following many months of negotiation, the UK and the EU agreed on the final terms of their future trading relationship, and the Isle of Man is covered by certain parts of that agreement. New rules took effect on 1 January 2021. Officers from the Isle of Man Government worked with relevant officials from across the UK Government to set out the Isle of Man’s priorities and discuss the implications of the end of the transition period for the Island. This work helped to inform the UK’s position but was also essential in building contacts with the people who are involved in the negotiations on the future relationship between the UK and the EU, so they are clear about the Island’s issues and priorities.
What challenges is the IOM’s market experiencing?
As evidenced above the opportunities outweigh the challenges. That said, it is fair to say that certain compliance-related aspects (sanctions, data protection) have become increasingly demanding on businesses.
These aspects are obviously all incredibly important, however, do add cost.
