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  • Simon Nicholas
  • Role
    Isle of Man Captive Association
  • “Parent involvement has definitely increased with a big push on loan backs to parents to provide liquidity to the group and there is more treasury involvement too.”

Prior to moving to the Isle of Man three years ago, Simon Nicholas worked for KPMG in Bermuda. Having amassed a great deal of experience in the captive industry, he is now on the committee of the Isle of Man Captive Association.

What impact do you consider Solvency II will have on the captive insurance industry?

As the Isle of Man doesn’t have to comply with Solvency II as it is not part of the EU, there is no direct impact as yet. Most captives in offshore jurisdictions are keen not to apply Solvency II given the burden, cost and time of compliance. Bermuda has been successful in lobbying the EIOPA on bifurcating its regulations, such that captives apply the existing regulations rather than Solvency II. It may be that if ever we were to need or want to apply Solvency II, we might choose to bifurcate in the same way. But the International Association of Insurance Supervisors’ core principles – released in 2011 – are similar to Solvency II, although more proportional. All 140 countries under the IAIS will have to comply with these principles whether they are Solvency II equivalent or not, so regulatory change will happen anyway. A key aim of the ICPs is to promote global consistency in insurance regulation so over time it’s going to become a level playing field, which will throw up new challenges in terms of the Isle of Man, or any offshore jurisdiction, in regard to how they gain a competitive advantage.

Do you consider the challenge of cost versus return to be a significant issue?

Costs are ever increasing as the regulatory burden increases and markets become ever more complex. Cost pressures combined with greater pressure from parents to utilise the captives’ surplus cash resources through loan backs are presenting a challenge for captive boards. The corporate government code here in the Isle of Man requires greater documentation and may lead to additional costs being incurred through internal audit or greater captive management fees. That said, the Isle of Man was awarded the most cost-efficient offshore jurisdictions by Reactions and so the Isle of Man is still well placed to ensure that managing a captive is cost-effective.

At KPMG in the Isle of Man, we’ve been working with clients who are conducting feasibility studies either for new captives/risk transfer vehicles or to assess cost versus benefits of existing captives. As costs rise and outweigh the benefits, particularly for captives in run-off, many captives are considering an exit through selling the remaining obligations to run-off acquirers in the hope of simplifying corporate structures. For some large captives, however, benefits clearly outweigh the costs and are almost profit-generating in the long term. It ultimately comes down to size. A number of captives in the Isle of Man are in run-off, like all captive jurisdictions. Many of the captives have become redundant due to merger and acquisition activity where both groups have captives. Some groups have amalgamated captives and for those who have yet to start analysing where their cash and expenses lie, they soon will – which in turn may lead to a further increase redomiciliation and amalgamations.

Are parents being more demanding of captive managers, perhaps looking for alternative ideas and efficiencies?

Amalgamation, run-offs, disposing of captives completely – these are some of the efficiencies and cost-saving initiatives at play at a group level. New ideas of how to use captives are not as dynamic as they could be, with employee benefits having been considered for the past few years. Here in the Isle of Man there have been three or four notable new start-ups recently, two of which are very large. As far as what is driving growth, a common theme is where groups are seeking to reduce insurance costs and analysing the way they manage their primary insurance structures. Self-insurance through deductible reimbursement captives have always been a popular solution and this is being seen again, and this is where the captive industry comes into its own.

What about parent involvement and interaction? Has that changed?

I would say group tax functions have become more involved, particularly due to the captives being offshore and the need to explain to the Boards that they are tax neutral rather than a tax avoidance scheme. An emerging trend has been driven out of changes in tax legislation – new CFC tax rules have meant any losses generated by captives couldn’t be used by the parent company in the UK and were essentially lost, so a handful of captives have changed their tax domicile in terms of becoming UK tax residents, even if they are still primarily based in the Isle of Man.

As noted earlier, parent involvement has definitely increased with a big push on loan backs to parents to provide liquidity to the group and there is more treasury involvement too. But these are all very cyclical, typical reactions of a recession/post-recession environment. Everyone is looking for cash and tidying up their affairs and reacting to political pressures regarding tax ‘morality’.

Are you seeing much redomiciliation?

It’s probably net flat with entities in and out. I’ve seen a couple of companies move – but both cases had more than one captive and their redomiciliation was part of streamlining their operations by merging their captives together. Captives from various jurisdictions have moved to the Isle of Man, certainly some clubs are looking to move here from Bermuda. I would say that Bermuda agreeing to Solvency II equivalence had initially made captive boards nervous, but there hasn’t been a mass exodus by any stretch, especially not now that bifurcation is widely accepted as an approach for regulating captives.

What other developments are you noticing at work in the captive industry?

I see many groups looking at how to better utilise cash and get better returns. Trusts are being looked at more and more as an alternative to letters of credit, as they are slightly more transparent, especially when needing to comply with Solvency II, which can be quite beneficial.

The Isle of Man captive market primarily holds cash and there aren’t many investment management mandates, which I’m surprised hasn’t changed over the past few years or so as groups have sought returns. The balance has been liquidity versus returns and generally most chose to remain in cash. That said, the current health of UK banks has reignited concerns, with counterparty risk still being a big worry, and now some captives will only put a certain amount of money with any one bank. And what with increasing capital charges by holding investments under the ICPs and Solvency II, many captives will be less likely to invest beyond cash assets. Over the next few years I expect to see many captives wondering if they should spread their money around to incur less of a capital charge with regard to credit risk.

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