Actuarial considerations within a UK captive regime

The London insurance market continues to be widely considered one of the leading and most innovative risk transfer centres globally, despite the UK having no presence as a captive insurance domicile.

Many leading figures within the insurance industry are pushing for better accommodation for a UK captive regime to further enhance the UK’s position as one of the leading insurance, reinsurance, and risk transfer markets in the world – leading to a planned government consultation scheduled for spring 2024.

However, established domiciles differ in terms of their captive regulation. It is important that the UK considers its own regulation to best accommodate its desired regime. Actuarial-specific regulations, in particular, could significantly influence the attractiveness of a future UK captive regime.

Initial considerations for a UK captive framework

Currently, UK captive insurance companies would be treated on an equivalent basis as traditional insurance companies, and as such bound by the same Solvency II capital requirements. However, it has been largely challenged that a single parent captive insuring the risks of only its parent company is unsuitable for this level of regulation. There would be far smaller implications for the local economy should insolvency of the captive occur, not least owing to the likely financial support available from the parent organisation.

Typically, UK companies setting up captive insurance companies choose domiciles such as Guernsey, Isle of Man, or Bermuda. To present an attractive captive domicile, the UK must first determine what it should offer for aspects such as solvency capital intensity – with more flexibility to amend this following the UK’s exit of the EU, underwriting remit (direct writing versus reinsurance), expert/outsource resource requirements, and wider governance and regulation.

Above all, applying proportionality to underlying captive regulation is fundamental for encouraging new captives. The underlying regulatory environment is crucial for a captive domicile. The UK will struggle to compete with other domiciles if its regulation is viewed as intensive and disproportionately burdensome.

Actuarial-specific considerations

While underlying regulation is pivotal for attracting captives into the UK, the ongoing costs and management for maintaining a captive insurance company are also important considerations.

Outside of captive management and claims handling, there is also the need to employ in-house or third-party actuaries to value liabilities to ensure the captive is sufficiently reserved. The extent to which an actuary’s expertise and ‘sign-off’ is required varies by domicile.

Therefore, the UK should also consider various actuarial aspects, such as the adoption of:

Solvency II (current framework) - Captives domiciled within the European Economic Area (EEA) are bound by Solvency II, requiring a “Head of Actuarial Function” (HoAF) to review each year the captive’s solvency and risk management. The Republic of Ireland has, arguably, the most robust actuarial requirements, in which the HoAF must also provide additional opinions on reserves (i.e., the technical provisions). However, lobbyists are recommending a UK captive regime outside of Solvency requirements altogether – due to its capital intensity and the UK’s exit from the EEA. As such, the UK could more closely mirror other captive domiciles − such as Guernsey – who also do not fall within the EEA and do not need to comply with Solvency II. Guernsey’s regulatory framework does not contain explicit enforcement for an actuarial presence for non-life insurance companies. However, best practice still sees many captives utilise actuaries for valuing historical liabilities – especially for longer-tail liability classes.
Solvency UK (proposed framework) - While the ongoing consultation for a UK captive regime continues, the Prudential Regulation Authority (PRA) is also holding simultaneous discussions for proposed changes to Solvency II now that the UK has left the European Union − touted ‘Solvency UK’. A UK captive regime could be more suitable under Solvency UK compared to Solvency II given the proposed reforms do at least acknowledge changes to proportionality and hence begins to address the previously highlighted concerns. However, it is unclear how significant these reforms will be. Beyond this, Solvency UK’s proposed framework also includes an adjustment to the risk margin and its corresponding calculations – something the Institute and Faculty of Actuaries (IFoA) have endorsed as a positive change. With these changes, an appointed actuary’s calculations of a captive’s capital requirements could reduce, which while not explicitly affecting the actuary’s involvement, would promote the competitiveness of a UK domicile over its EEA counterparts.
IFRS 17 - Beyond these areas, additional actuarial support would also be required for captives reporting under International Financial Reporting Standards (IFRS). The recent introduction of IFRS 17 applies new measures to valuing (re)insurance contracts on an insurance provider’s balance sheet. While some domiciles mandate reporting under IFRS, UK domiciled companies could instead report under UK Generally Accepted Accounting Principles (GAAP) – which wouldn’t necessitate this actuarial analysis. As long as both of these reporting frameworks are available to UK captives, this difference in the UK’s reporting framework may present further benefits, as captives would not be mandated to comply with the additional accounting and actuarial requirements of IFRS 17.

Depending on the complexity and size of the captive, actuarial fees can often be in line with (or even greater than) captive management fees. Therefore, the combination of these two ongoing costs should form part of the wider consultations as this will not be an immaterial factor to prospective organisations.

Can the UK offer its own unique selling point (USP) for captives?

Aligning with other domiciles’ regulation will only put the UK on a level playing field. While the UK’s deep insurance and alternative risk transfer expertise itself is highly valuable, this may be insufficient for convincing prospective captives to choose the UK over other domiciles. Bermuda, the Isle of Man, and Guernsey all have established reputations as domiciles, which the UK may struggle to counteract – particularly for non-UK companies. The potential tax benefits regularly cited as a benefit of certain captive domiciles could be nullified by plans to implement a minimum tax level across many established domiciles in 2025. A move that would further increase competition between captive domiciles.

A potential UK captive regime could allow direct captives in addition to reinsurance captives – crucially then allowing UK captives to write compulsory classes of insurance (e.g., employers’ liability and motor third party) without the need for fronting and associated fees charged by admitted insurers. However, the regulation needed for setting up direct captives can be more complex than a reinsurance captive. As such, it has been noted that an initial UK captive regime should focus on reinsurance captives, with accommodation of direct captives a longer-term goal to attract UK-parent companies over other domiciles as their preferred destination.

How close to being realised is UK captive reform?

Captive formations have grown significantly over the last few years due to a continued hardening insurance market – a trend likely to continue regardless of how insurance pricing fluctuates in the future. The EU has recently agreed to consider reforms of Solvency II, which, if implemented, may revitalise the competitiveness of EEA domiciles and limit the UK’s ability to attract non-UK companies.

Although advocates within the UK insurance industry are pushing for these changes now, numerous obstacles remain in the way before any sort of regulation change is implemented. While further consultation is due in Spring 2024, an approaching general election − and possible change of government − could halt further progress.

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Article

Actuarial considerations within a UK captive regime

Initial considerations for a UK captive framework

Actuarial-specific considerations

Can the UK offer its own unique selling point (USP) for captives?

How close to being realised is UK captive reform?

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Actuarial considerations within a UK captive regime

Initial considerations for a UK captive framework

Actuarial-specific considerations

Can the UK offer its own unique selling point (USP) for captives?

How close to being realised is UK captive reform?

Related insights

Letters of Credit: Challenges to insurer collateral requirements

Managing risk in a volatile business environment: The role of integrated risk quantification

Green hydrogen: Energy remedy or safety headache?

Risk in Context Podcast: Building a resilient organisation