- Chief Marketing Officer of the Willis Global Captive Practice (Europe)
“Overall, there’s a general domestic regulatory trend resulting in more and more regulations in every jurisdiction, which in turn puts more pressure on captive managers.”
Chief Marketing Officer of the Willis Global Captive Practice (Europe) and Managing Director of Willis’ Guernsey captive management operation, Dominic joined the company in 1995. He has extensive experience in the establishment and management of captives and nice insurance companies and is also Chairman of the Guernsey International Business Association.
What are your views on some of the key issues affecting the captive industry today, such as Solvency II and increasing costs?
The urgency of Solvency II depends on what domicile you’re in. Guernsey is an interested observer but we’re not necessarily that involved. Cost and the challenge of demonstrating value relative to cost is certainly a key issue. I haven’t seen a diminishing of returns but there is a greater focus on governance and a higher level of interest on the part of captive parents. However, this is part of a developing international trend towards higher levels of governance generally – greater scrutiny of captive operations is a natural part of that. As for redomiciliation, that’s related to the perception of offshore workers from onshore. In the US, captives are being set up in some home states and there are quite a few EU clients who would rather do business in Europe, but many are eager to stay outside Solvency II. The focus of Solvency II isn’t really appropriate for captives; it’s a bit over-engineered for their purpose. The IAIS, however, is intent on taking the money industry in the direction of risk-based regulation and Guernsey is very interested in this.
How do you view the future of the captive industry for managers? What emerging markets do you see?
There is a lot of incentive for corporations to pay a lot of money in China – as there was no insurance there in the past, retention of risk is accepted. The Chinese market is westernising and Willis are doing a lot of work there in terms of insurance and risk assessment and modelling. There is interest in the Middle East as a market too. More companies are recognising them so captives will develop and play a role. There isn’t much take-up at the moment but this may increase as the Middle East looks to become more international. In the US, a few onshore states have developed significant growth – for example South Carolina – and they are definitely taking advantage of doing their business at home but this isn’t really a recent trend. In Europe, company captives tend to be in local locations. Overall, there’s a general domestic regulatory trend resulting in more and more regulations in every jurisdiction, which in turn puts more pressure on captive managers. There’s also an increasing demand for a higher level of technical skills in managers on the underwriting and insurance technical side, as well as IFRS accounting requirements, which are now significantly greater than before. Over the past five to ten years, the breadth of technical expertise needed by captive managers has increased significantly and is only going to keep on growing. I think managers are going to have to be more and more professional.
How is the captive industry developing? Is the structure of cells changing?
The use of PCCs and ICCs is growing. There used to be fairly significant differences between the two in terms of tax treatment and consolidation and so on, but in the core Guernsey and UK market those differences have largely been removed by changing tax and accounting rules. Now it’s a question of what is administratively convenient and the potential cost benefits of using a PCC as opposed to an ICC. There’s no trend away from PCC to ICC – in fact I don’t think ICCs have any particular advantages but they do actually have slight increases in cost. I believe that aside from occasional – and unusual – structural requirements where an entity but not independent governance is needed, the PCC is set to be the vehicle of choice for the ‘rent-a-captive’ industry in the future.
With regard to new structures and business, are you seeing any new trends emerging, such as employee benefits?
We’ve always done a useful amount of employee benefits. As our business is very much major account focused, the spread of risk that employee benefits bring to the captive is useful in terms of the efficiency of financing and getting a good return on capital. I wouldn’t say this is a trend – it’s a natural part of operating in the major account sphere. There isn’t any new business from any other industry sector, such as the insurance industry, either. The most activity is where there are the biggest retention issues and where risk is most significant. So the transport, energy, petro-chemical, financial and pharmaceutical sectors are where you’ll see the most active captives. And, of course, you’ll find reactive captives where the market isn’t providing complete solutions.
Would you say the reputation of captives is changing?
There is a tendency in some quarters to associate offshore with tax driven structures. But captive structures are not actually tax driven. There can be reputational issues that mean some prefer to do business on home soil but it’s usually less efficient, so people come offshore for efficiency and regulation rather than for tax purposes. And while captive is not the only way of overseeing and financing risk – effective alternatives do exist – many companies with the best of intentions have put in place non-regulatory governance structures that have ended up not pricing or overseeing risk as thoroughly as a captive would. So, if anything, having a captive should be reputation enhancing.