A place to call home
Once a company has decided it wants a captive, the choice of where to base it is one of the most important decisions it will have to make. Several increasingly attractive European jurisdictions are now vying for the business. Captive International reports.
When assessing where a captive should be based, the first step in the process is to conduct a feasibility study. That will not only reveal whether a captive is indeed the right solution but will also shed light on where the captive should be based.
“That helps us establish a modus operandi, and if the right option is a captive the feasibility study will also reveal which programmes should be considered for it, and also which locations might be suitable,” says Michael Matthews, commercial director, international at Artex Risk Solutions.
There are many things to consider when it comes to domicile selection, especially the experience a captive insurance jurisdiction has, and the strength of its regulatory environment. Specific legislation relating to structures such as protected cells will be an important factor.
Companies will also tend to be drawn to jurisdictions that have a good infrastructure for captives, including specialised captive management companies, lawyers, accountancy, and actuary firms.
“The choice of location is not about looking for the best tax regime or light touch regulation as it was 10 to 15 years ago.”
Michael Matthews, Artex Risk Solutions
Type of captive
The first thing to consider is whether a prospective structure will be an insurance or a re/insurance captive, says Ronan Ryan, managing director at Robus Risk Services (Malta), which also has offices in Guernsey and Gibraltar.
“For an insurance captive, there is no choice but to be established in a Solvency II jurisdiction,” he says, meaning usually Malta, Ireland or Luxembourg. Re/insurance captives have more options, including Guernsey, Gibraltar and the Isle of Man.
The calculation about where to domicile a captive has changed a lot in recent years, according to Matthews. “The choice of location is not about looking for the best tax regime or light touch regulation, as it was 10 to 15 years ago. Tax transparency and Economic Substance regulations have changed all that.
“Captives jurisdictions are much more aligned now—there is more of a level playing field when it comes to rules and their application.”
There are, however, some important geographical differences. In Malta, which is bound by Solvency II regulations that impose relatively heavy capital requirements on captives against the risks they take, insurance can be written directly in Europe. In Guernsey and the Isle of Man, it cannot—although the capital requirements are commensurately lower.
“What the client is trying to achieve with its captive, and its choice of location, go hand in hand,” explains Matthews.
The question of Solvency II is, therefore, crucial. Guernsey remains the largest jurisdiction for captives in Europe, and the fact that it sits outside of the Solvency II regime is a large part of its appeal, says Nick Frost, president of captive management at Davies, which has opened an office on the island.
“Guernsey has always sought to be at the forefront of the game. It sits outside the Solvency II regime, yet its strong governance and financial principles have ensured its continuing development. Guernsey’s approach to capital and solvency—a Solvency II light approach, augmented by its leading position in protected cell companies—provides it with an undeniable and unique selling point.”
“We are seeing a lot of interest in captives from the UK, who in the main have Guernsey as their domicile of choice.”
Nick Frost, Davies
Flexible and stable
Frost says Davies chose to set up in Guernsey because of its good reputation and regulatory regime. “Guernsey’s proximity to major insurance markets, ease of undertaking business and pragmatic approach to the implementation of legislation have delivered flexibility where needed, stability when demanded and a can-do business approach which is very important to us,” he explains.
His comments will echo those of many captives owners that have made the same choice. “We are seeing a lot of interest in captives from the UK, who in the main have Guernsey as their domicile of choice,” Frost continues.
Davies is eyeing other opportunities in Europe to support its existing and future global captive insurance clients, in tacit acknowledgement that Guernsey is far from the only captives domicile in Europe. “Malta is certainly on our post-Brexit road map,” he says.
Oliver Schofield, managing partner at Risk and Insurance Strategy Consultants (RISCS), stresses that the capitalisation levels required for an EU-based captive under Solvency II are significantly higher than would be required in Guernsey or Bermuda, for example.
Being based in the EU allows the captive to issue policies directly within the bloc, which is a significant advantage.
“In most cases, however, it would be cheaper for a Guernsey-based captive to pay fronting fees to another institution to issue on its behalf, rather than going through the cost of re-domestication and Solvency II capital compliance,” says Schofield.
“For a lot of captives, being based within the EU at the whim of government, compared to being offshore, will not make economic sense.”
Being outside Solvency II is not the only thing Guernsey has going for it, however. “Guernsey’s biggest differentiator is its can-do attitude, a good example of which is the pre-authorisation regime introduced in late 2020,” says Matthews.
“This allows clients and brokers to run a number of renewal strategies in parallel and demonstrates Guernsey’s commercially-minded attitude. It understands the market and creates solutions to help businesses solve their challenges.”
Despite this, Matthews notes that European captive sponsors tend to choose not to domicile in Guernsey. “For companies in Asia-Pacific however, Guernsey is very convenient. It is partly a time zone thing: an Australian parent dealing with a captive based in Bermuda is very difficult to arrange, late afternoon in Australia overlaps with the morning in Guernsey. Its proximity to London is also a big advantage and its structures all work well.”
Companies on the continent are more likely to choose jurisdictions such as Luxembourg and Switzerland.
“A French company may prefer to domicile in Luxembourg, not just because of the language but because of the legal system. It is the same reason why UK companies tend to prefer Guernsey or the Isle of Man. If a company has existing relationships in a particular domicile, or has a bank account there, that can also be a factor,” Schofield explains.
There is also a question of perception. At a time when government budgets are under enormous strain due to the COVID-19 support measures that have been taken, the debate about tax fairness has flared up again, just as it did post-2008. Companies will be aware of how it looks if they operate business in jurisdictions that are perceived as tax havens. In the age of social media, this matters more than ever.
Overall, Schofield predicts that most of the growth in European captives will continue to happen in Guernsey.
“We are currently working on six new captive launches, four of them for UK-based clients that are establishing in Guernsey. It is also welcome that the Isle of Man has started a new campaign to encourage captive formations there.
“Competition and choice are always important to insureds and captive owners,” he concludes.