Thomas Miller Captive Management Limited
CIT talks to Ross Dennett of Thomas Miller Risk Management in the Isle of Man about the island’s offering, risk management needs and Solvency II
Why do companies go to the Isle of Man for their risk management needs?
The Isle of Man is a world-class centre for offshore finance. There are several reasons why the Isle of Man has been a popular captive domicile over the years. Some of the key reasons are:
The Isle of Man is situated in the heart of the British Isles and is therefore within easy reach of major financial centres in the UK and Europe. It is one of the longest established and best respected offshore financial centres
It has a highly experienced supervisor in the Insurance and Pensions (IPA) that is approachable and responds swiftly. The IPA is committed to the continued development of an appropriate and up-to-date regulatory framework and was one of the first domiciles to introduce legislation allowing captive insurance companies from other territories to re-domicile to the Isle of Man without being liquidated in the original territory
The island has been on the OECD white list since assessments were released, and holds an AA+ Standard and Poor’s rating, which in the current global context is most certainly a factor
Isle of Man insurance companies are subject to income tax at a rate of 0 percent.
The island is politically stable. As a crown dependency, it is not part of the UK, but its foreign relations and defence are the responsibility of the UK government
It has its own legal system, Manx law, which is based on principles of English common law
It has competitive capital requirements, which are significantly lower than domiciles that are based within the EU.
Sitting outside of the EU prevents an Isle of Man captive from direct writing within the EU. Some companies view the associated additional fronting costs as a deterrent and choose to either re-domicile or establish another captive within the EU, however on the flipside, capital requirements are significantly lower in the Isle of Man.
Despite soft market conditions and financial market volatility, the island has continued to be successful at attracting new business. Total assets of £55 billion and annual premiums of £10 billion at the end of 2010 represented year-on-year growth of 17 percent and 36 percent respectively.
What sorts of captives do you manage?
Thomas Miller manages all sorts of captives, ranging from privately owned broking businesses to multinational companies. We currently manage 10 captives, as well as various mutual insurance companies. They are typically domiciled in the Isle of Man, but, subject to appropriate regulatory criteria, we do occasionally manage companies in the Isle of Man that are domiciled elsewhere.
How have the risk management needs of captives in the Isle of Man changed in recent times?
Unsurprisingly, there has been an emphasis and a constraint on companies through costs, cash and capital in recent years. There has also been an increasing focus on risk management and governance, which was the key theme within the recently introduced Corporate Governance Code (CGC). The CGC is a very significant development in the Isle of Man’s regulatory framework and is pivotal to our ability to continue to demonstrate compliance with international standards.
Rather than in response to the presence of any perceived systemic risk or governance issues within the Isle of Man, the CGC seeks to apply a standard set of rules across the insurance industry. While the captive sector is generally considered to be at the lower end of that risk spectrum, there are no carve outs for the captive sector and the code is applied across the board. It is obviously in the broader interests of the Isle of Man for companies to demonstrate to the wider world that the sector complies with the code. It is important to note that in many aspects, current practice was already compliant with the code. Typically, managers have undertaken an appropriate gap analysis to flag improvement areas. The positive way in which the local insurance industry has reacted to the CGC demonstrates its maturity and expertise.
How focused are captives on risk diversification as a means of ensuring financial stability?
Nearly all of the captives that we manage limit the business written to their own operations, as opposed to third party business. Selection decisions tend to relate to the extent that the shareholder and the captive board are comfortable retaining greater risk rather than transferring it into the conventional market. Market rates naturally influence that decision-making process.
What is the situation with Solvency II in the Isle of Man and how do you expect it to affect your offering and the captives that you manage?
Unlike other leading captive jurisdictions, the regulator has consistently stated its position on Solvency II. It continues to monitor the development of Solvency II and its implications for the island in conjunction with the Isle of Man government and the insurance market. Their view remains that it would be premature for the island to commit to seeking Solvency II ‘equivalence’ at this stage.
Regulation in the Isle of Man is closely aligned with the guidance that is provided by the International Association of Insurance Supervisors and its core principles, which is a gold standard for insurance supervision. The IPA has created a regulatory framework for captive insurance that is robust and tailored for the size and complexity of the insurance operations, while maintaining sufficient supervision to protect policyholder interests and the reputation of the island.
Implementation of the EU directive will require considerable enhancement in the regulatory framework of most European insurance regulators and attaining an equivalent position for the island would also entail significant initial and ongoing investment in resources, both for the regulator and the island’s insurance market. There are undoubtedly various twists and turns still ahead but the most obvious factor is the cost that is associated with achieving compliance with Solvency II, as well as the capital requirements. Captives are relatively simple business models and we may find that some captive owners feel that applying Solvency II principles and the associated costs are unnecessary and excessive. They could well decide to re-domicile their captives elsewhere.
