Isle of Man
In a bid to further develop the Isle of Man as a domicile, regulators have made some key regulatory changes.
At the end of last year, the Isle of Man government decided to merge the Insurance and Pensions Authority (IPA) and the Financial Supervision Commission (FSC) together under a single regulator.
The integration between the existing IPA and FSC functions would be a long-term objective that would need to be approached with due consideration by members of the authority.
With the new combined regulatory authority system came a new chief executive, Karen Badgerow, who relocated from her previous role in Canada to the Isle of Man Financial Services Authority.
The Isle of Man has also seen other regulatory changes, including the material changes to accounting standards from 1 January this year, which altered the reporting requirements for captives and captive managers.
In addition, Ross Dennett, chairman of the Isle of Man Captive Association, reveals there are also plans to launch the first quantitative impact study (QIS) for the non-life insurance sector in the next few months.
Dennett explains: “Whilst such initiatives require participation, time and effort from the industry, they ultimately all add value and security to our clients.”
Currently, the Isle of Man has approximately 120 captives licensed in its non-life sector, and last year saw the island’s gross premiums written reach £1.4 billion and funds under management total around £6.3 billion.
Most of the captives domiciled in the Isle of Man are UK-parented organisations representing a range of industry sectors such as energy, engineering and manufacturing.
According to Badgerow, the Isle of Man is a “very mature” captive domicile and has experienced a quieter year in 2016 so far. She suggests that this is due to uncertainty around Solvency II at the start of 2016 and, of course, the Brexit vote.
Although the Isle of Man is not a member of the EU and therefore is not subject to the Solvency II regime, Badgerow notes that the Solvency II regime for some captives will result in additional costs from a capital, and compliance perspective.
She reveals that to date, the Isle of Man is yet to see an “influx of insurers seeking to redomicile from Europe to the Isle of Man as a direct result of the implementation of Solvency II”.
However, Dennett says, “the sector is certainly seeing several specific examples of clients with captives domiciled within the EU seeking a simpler and pragmatic approach”.
He says: “This is particularly the case with simple structure captives with relatively conservative risk retentions. Minimum capital requirements can certainly be excessive this being compounded by overly burdensome Solvency II compliance. Of course Solvency II is fundamentally good business practice, however, for a simple captive company can be way over the top.”
Badgerow reveals the island is currently updating its own regulatory framework in accordance with international standards and will be introducing its own risk-based capital regime.
OECD and BEPS
The insurance industry is also experiencing ongoing issues around tax matters in terms of the increase in the UK’s insurance premium tax and diverted profits tax plus base erosion and profit shifting (BEPS), which Badgerow claims “all potentially create a level of uncertainty”.
The BEPS Action Plan, released by the Organisation for Economic Cooperation and Development (OECD) and endorsed by the G20 countries, has “naturally drawn a lot of attention”, according to Dennett.
The report on the 15 BEPS focus areas reflects recommendations for significant changes in international tax law and treaties. Dennett suggests the attention has now turned to the actions that are taken by countries in response to these recommendations.
He says: “Inevitably the introduction of the BEPS framework will have an impact across the board, therefore the Isle of Man is not unique or specifically any worse off than any other countries and/or domiciles. It is a level playing field.”
While BEPS will be on the agenda for monitoring and review by many owners of captive insurance companies, captives are not established primarily as a means of reducing tax liabilities.
Badgerow suggests that BEPS will be one of a number of issues being considered by risk managers when considering their group’s overall risk strategy.
Dennett reveals that the Isle of Man is yet to see any concern from captive owners over BEPS and notes that for captives managed responsibly, the tax-related advantages are secondary.
He says: “Most captives are professionally managed in accordance with strong corporate governance control and are therefore subject to robust protocols around premium benchmarking, claim and incurred but not reported reserving.”
After the UK’s decision to leave the EU in June, there has been a lot of questions around what a Brexit will mean for the captive industry. Arguing although the Isle of Man is located outside of the EU, and not directly affected by the Brexit vote, Badgerow reveals that regulators did some work in advance of the vote to understand what the impact would be.
She notes: “Most of our firms in the captive and non-life markets are UK-parented and it will depend on the extent to which the decision to exit the EU impacts them.”
There has been talk of whether Brexit could increase interest in domiciles such as the Isle of Man and other domiciles situated outside the UK, however, Badgerow claims: “Everyone seems to be taking a wait and see approach in terms of what the impact may be”.
In the meantime, she explains that it is important for the Isle of Man to work on updating its regulatory framework around the International Association of Insurance Supervisors insurance core principles project and the development of a regulatory regime that will be considered equivalent to Solvency II.
Badgerow says: “That work will continue to be important regardless of the UK being in or out of the EU because for our firms who do want to work or conduct business locally it is really important that the Isle of Man completes its regulatory review.”
She adds: “At the end of the day the proposition to have a captive is still very attractive for many firms.”