Access to market, approachable regulators and an offshore location are all key assets for any captive domicile. The Isle of Man has them all, as Liz Booth reports.

There is a new mood on the Isle of Man – a new determination that the island should not only be firmly placed on the global map but be extremely visible too. Everyone involved in the financial services market on the island is agreed that the island stands up very well when compared to other destinations. But they recognise there is still a need to get this message across to the rest of the world.

According to the Isle of Man Insurance & Pensions Authority (IPA), at the end of 2007 there were a total of 155 authorised insurers and seven protected cell companies (PCCs) licensed on the island. Premiums written by these insurers were in excess of £1bn, with funds under management of more than £5bn.

Derek Patience, chairman of the Manx Insurance Managers Association (MIMA) and head of office for captives for brokers Marsh on the island, firmly believes that the island is in the top tier of captive destinations worldwide. The bulk of captives on the island come from UK businesses, he says, with a significant number from Continental Europe. The island also attracts business from Eastern Europe, South Africa and Asia.

Casting the net

John Spellman, director of Isle of Man Finance, believes there are “international points of gravity where business will go to”. He says the island has done well in developing non-EU-based solutions and has attracted business from much of the rest of the world. He admits that Vermont or Bermuda, are more likely to pick up US-based business, however.

Nevertheless the Isle of Man has done very well in attracting business from a wide range of destinations. And the authorities clearly have plans. Spellman says, “I think China is a tremendous opportunity. There is plenty of business for everybody out there. I won’t let the cat out of the bag but we are happy to compete for that [business].”

Dominic Wheatley, chief marketing officer, Willis International captive practice (the largest manager on the island), makes the point that the proximity of the Isle of Man to London makes it attractive for those wanting to come to London to do business and then sort out their captive interests in just one trip.

The island’s proximity to the European Union plays to its advantage as well. Although not able to offer the passporting rights of destinations such as Dublin, Gibraltar and Malta, the island does offer a more flexible approach to regulation. MIMA’s Patience says, “We may not be able to direct write into EU states, we can write into the EU on a reinsurance basis. The disadvantage of having to front is balanced by the advantage of flexibility.”

“The island has done well in developing non-EU based solutions and has attracted business from much of the rest of the world

Patience admits, “Things have been quiet, mainly because of the soft market particularly in the general insurance arena” but he says captive owners are still being attracted to the island. Its drive for quality business is working, says Patience, and the island as a whole is working to “make sure we get a fair share of any new business coming in”.

Regulatory renaissance

The efforts seem to be paying dividends. The combination of more aggressive promotional activities and a flexible legal structure has brought success in the past year. A change in the law recently gave the IPA increased flexibility concerning solvency requirements. And the changes had an immediate effect. FTSE 250 company, the Keller Group, set up an Isle of Man captive called Capital Insurance Limited to replace its existing EU captive.

Patience says: “The Isle of Man’s success in attracting such a prestigious company as Keller to the island is a fine example of the healthy cooperation that exists between the island’s industry and the regulator. MIMA lobbied the IPA to improve the existing regulations and they took the appropriate steps to amend the existing regulations, creating the prime environment.”

The legal changes allow inter-company loans from a captive to be fully admissible when calculating the captive’s solvency margin and permit new forms of regulatory capital, subject to the approval of the Isle of Man Insurance Supervisor. Spellman adds, “It is powerful for the Isle of Man to reap such a quick reward of the recent regulatory change concerning inter-company loans and we certainly believe that other captive owners will follow suit as they observe the pragmatic innovations we are implementing.”

Last year also saw the arrival of BAE Systems, Millea Holdings and Vaultex UK (a Barclays and HSBC joint venture), which all formed Isle of Man captives in 2007. The island also saw its first PCC launched as well.

But the domicile’s movers and shakers are not resting on their laurels. Spellman says, “We have started promoting ourselves more aggressively. We have introduced PCC legislation and are in the process of developing ICC legislation, which should happen in 2008.”

Andrew Tunnicliffe, group managing director, business development, Aon Global Risk Consulting, believes the island offers conditions “as good as they get anywhere” for captive owners. He says that “some owners are looking for a breath of fresh air” when choosing their captive location and believes that the Isle of Man has much to offer. He also sees opportunities for the island to develop its niche opportunities. The space industry, for example, is starting to consider the island as a financial centre.

“Unlike certain rival jurisdictions such as Bermuda, the Isle of Man has a flexible attitude to work permits and plenty of housing

“I think the ability to create certain niches is absolutely critical,” says Tunnicliffe. “Talking recently to a colleague at Aon Re about the move by those in London to set up in offshore locations, the question was: ‘Why go to Bermuda when [the Isle of Man] is so close?’” He adds that the flexibility of the regulators and the ability to have senior people attend client meetings on the island has certainly helped develop more interest. Like Spellman, he sees opportunities for the island to develop business out of Asia and Eastern Europe too. But he believes the key will lie in remaining flexible and continually innovating in terms of legislation and approach.

Continuous journey

Willis’ Wheatley warns that being the first to develop a concept is not enough. Innovation has to continue. He points to Guernsey and the way it brought the PCC concept to market first. It gave the island an advantage, he says, but only for as long as it took other destinations to develop the same rules. He is delighted the island has managed to attract new business, despite the generally soft insurance market but he says it is the sensible move for businesses.

Using the golfing metaphor: “You don’t wait until you are in a bunker to buy a sand wedge”, Wheatley says this is the right time for businesses to consider captive operations. By launching in a soft market, businesses are not under pressure. They can also build up the captive in the first vulnerable years at a time when reinsurance costs are relatively low.

Wheatley also sees changes in the captive market as companies look to use their captives in broader ways than simply corporate risk financing. “There is growing demand to use insurance vehicles for value-added strategy purposes,” he says. This is a major difference between the European market and the US where captives tend to be pure and simple corporate risk financing arrangements. But he says use of captives is comparatively high and still growing in the US and it is likely that growth will continue elsewhere as the captive message spreads across the world.

The Isle of Man should be well placed to win a good share of that new business, with its combination of innovation and the right environment in terms of people – not least the government’s flexible attitude on work permits and the lack of a housing crisis, both major issues in rival destinations like Bermuda. “When I compare jurisdictions side by side, the Isle of Man is as strong as any location and I am delighted to go head to head with the likes of Bermuda or Guernsey for business,” says Spellman. “We have kept our light under a bushel for a number of years so it is about time we showed other jurisdictions what we have to offer.”

Liz Booth is a freelance journalist.

Isle of Man: Global 1500 Viewpoint

Last year, brokers Aon produced a report into the global 1500 companies and their views on captives.
The 'Global 1500: A Captive Insight' found the captive market remains underdeveloped with more than half (53%) of the current Global 1500 companies not currently owning a captive.
The sectors missing an opportunity include manufacturing and communications, where 55% and 62% respectively do not have captives, but even sectors that have greater take-up still show room for growth. For example, 44% of the largest financial and insurance companies and 39% of mining companies still do not use captives.
The prospects for growth remain good. G1500 companies had 1,061 captives at the time of the research last year with Aon predicting the figure would rise to at least 1,200 by the year 2010.
The research showed the Isle of Man as the fifth leading domicile choice with 41 captives and 3.9% of the market (as of February 07). It also revealed the strong link between parent location and choice of captive domicile.
The report found: "Domicile choice may have as much to do with cultural factors and personal preferences, not to mention geography, as business considerations. Not surprisingly, UK companies favour their local domiciles, Guernsey and Isle of Man."
The research also that for finance and insurance companies the Isle of Man lies in sixth position with 9% of the market.

Leading domicile choice (data as at February 2007)

Domicile Number of captives Percentage of total
captives
Bermuda 277 26.1%
Vermont 201 18.9%
Luxembourg 111 10.5%
Ireland 99 9.3%
Guernsey 97 9.1%
Isle Of Man 41 3.9%
Barbados 35 3.3%
Cayman 28 2.6%
Singapore 25 2.4%
Switzerland 25 2.4%
Hawaii 20 1.9%
Sweden 14 1.3%
Netherlands 9 0.8%
Australia 7 0.7%
Neth Antilles 7 0.7%
New York 7 0.7%
Arizona 6 0.6%
South Carolina 6 0.6%
Gibraltar 5 0.5%
New Zealand 4 0.4%