Fundamentally, captive insurance arrangements seek two principal objectives – managing risk and commercial benefit. Of course, there are plenty of other considerations when establishing a captive but in almost every case these two goals are at the core.
Balancing risk management and commerciality can be challenging so it is essential that captive owners find the optimum environment in which to operate. And that starts with the choice of jurisdiction. You don’t want layer-upon-layer of unnecessary compliance costs that can undermine the commercial outcome and, equally, you want to avoid an environment where commercial flexibility is at the expense of strong governance.
As auditors or professional advisors to many of the Island’s captive insurers, we have an excellent vantage point to see how well this fine balance can be achieved in the Isle of Man where the audit function itself is an essential part of the overall governance framework. We also see firsthand the significant financial contribution a well-managed captive can make to parent group balance sheets year on year and the risk management insight and benefits from having an overview of all their claims in one portfolio.
The regulatory and governance framework in the Isle of Man sets extremely high standards for captive insurance whilst recognizing the need for proportionality in its approach. The operators, the Insurance Managers, are subject to rigorous fitness and propriety standards ensuring the highest professional standards are at work in the day to management of captives. The insurance entities themselves work within a mature governance code covering financial, risk and organizational management. All of this is continually monitored by the Isle of Man’s Financial Services Authority.
It’s a multi-layered approach but not a one-size-fits-all ethos. Individual risk profiles are recognized within the regulatory system allowing captive insurance companies to maximize their commercial value. This can be seen to great effect in the soon-to-be-introduced treatment of ‘pure captives’ in the Isle of Man, which recognizes the contained risk of single parent captives. This new commercial environment is the result of several years of collaborative work between captive industry professionals and the regulator and serves as a prime example of the balanced approach you find in the Isle of Man.
In the current hard market we are seeing renewed and heightened interest in captives as a risk management tool. Chief Risk Officers interested in this option would do well to cast an eye in the direction of the Isle of Man’s captive solutions, where governance and commerciality combine in harmony.