According to Isle of Man Government Insurance and Pensions Authority, the island had a net loss of eight captives in the year ending 31 March 2000 (see Table 1).
David Brown, SINSER (Isle of Man), attributes this static position both to the prevailing soft market in 1999 and to more stringent legislation with the controlled foreign company rules. “Now that the market has started moving in the other direction, interest in captives may increase.”
He believes that regulatory and fiscal conditions have become less important in selecting a captive location. “There is not a great deal of difference between the Isle of Man, Guernsey or Bermuda, for example, in terms of regulation. However, the cost factor of getting staff is one of the biggest factors in choosing a domicile.”
Mr Brown disputes the critics of the tax regimes of offshore centres. “It's surprising that the EU criticises centres like the Isle of Man because Europe is probably one of the most poorly regulated places in the world. In fact, we have probably got better regulation than some European countries, such as Austria, Germany and Luxembourg. I think we have got to show people what we are actually doing by way of regulation, following the Edwards report, instead of just taking a defensive stance. We need to be positive, showing that what we do is not so bad.” However, he does not think that the pressure for reform from Europe will be resolved in the short term.
The Isle of Man's captives write all types of business, ranging from conventional risks to niche business (including alternative risk transfer). They achieved £1 billion premium volume in 1998 (the 1999 figure is not yet available but is expected to be similar). Despite the poor results of the commercial insurance industry, Mr Brown believes that the captives have performed well. “They always have done, and their ratios are very good. The basic captive concept - taking a self retention area and placing business on a wholesale basis for reinsurance - really does work if it is done properly.”
Sponsors originate from a wide range of locations, although most are based in the UK (See Table 2). Mr Brown considers that sponsors - particularly those in the UK - are becoming more demanding in respect of their captive management requirements.
“Risk managers are becoming much more sophisticated and technically minded. The old days of relying on a major broker for everything are changing. Risk managers are increasingly making their own decisions on which markets they are going to use and captives are part of that. They are becoming more involved in placement and protection by way of reinsurance - they may use a broker or do it themselves. There are a lot of highly intelligent risk managers around who want to be in control of what they do.”
SINSER (Isle of Man) added three new captives to its client list in the last 18 months - all from non-UK sources. This reflects the company's strategy of focusing on international markets, a strategy that Mr Brown considers the domicile as a whole would benefit from. “The island needs to do more in the way of marketing and we are working with government on that. Most of the island's business in the captive insurance area comes from UK sources. We have got to change that and become much more internationally biased. In fact, the portfolio of Isle of Man captives is changing gradually.”
He sees another key feature as the development of financial reinsurance, primarily in Bermuda. “That will increasingly have a place in the structures that risk managers are developing. Captives may have a role in placing that financial reinsurance, possible through a separate programme.”
EIMS general manager Chris Johnson, in his presentation to an IBC European captives convention in London earlier this year, pointed out that Isle of Man captives continue to boast one of the highest ratios of net written premium and surplus per captive (at approximately £5.6m and £28m respectively).
“They consider the drop (in captive formations) is largely due to a slow market in general, exacerbated by a high degree of mergers and acquisition activity on the part of their clients.”
He added that: “The island sees a wide variety of opportunities for new business, in terms of capital market products (bonds, securitisation of risk), as well as customer insurances and warranty vehicles. They see a trend in conversion to self management, for example in the case of TCW Insurance (customer insurer belonging to The Carphone Warehouse), who moved Marsh into a consultancy role to go self-managed in 1998.”
The Isle of Man has rejected the possibility of introducing legislation to provide for the formation of protected cell companies. However, it is not concerned about OECD and EU moves to remove harmful tax competition, on the basis that captive formations nowadays are not