New Year message from Malcolm Cutts-Watson, Founder & MD of Cutts-Watson Consulting Limited (“CWC”)
Well, what a year 2016 turned out to be! Political ballots dominated the news and the implications are reverberating into 2017.
Parochially, CWC enjoyed substantial growth in its first full year of operation. I am delighted with the team we have assembled with the additional bench strength of 2 highly experienced and well regarded consultants, Paul Wakefield and Graham Powell, joining the team. Our COO, Niall Lucas, has been busy bolstering our operational and marketing platform. His latest initiative is to refresh our website (www.cuttswatson.com) and I invite you all to take a look at the enhancements including a list of services we can provide to the various captive industry stakeholders. We are also active on LinkedIn and I encourage you to follow our posts, connect with us and join in the debate.
I wish to thank all of our clients for engaging us and we have built up a portfolio of diversified appointments which reflects the breadth and depth of knowledge we possess.
So onto 2017. What do I see as the key opportunities and challenges to the captive industry?
I was going to adopt the traditional approach of just looking forward a year but the magnitude of recent events advocates taking a longer view. As Winston Churchill said ”the further back you can look, the farther forward you are likely to see”. Focus to date has been on Brexit but I think we should be taking a wider perspective and consider the impact of other (maybe the majority of?) member states withdrawing from the EU. Certainly Italy, France and Ireland are likely to join Greece as top exit contenders. How should captive owners plan for the possible break-up of the EU and the abolition of cross-border passporting of services?
Of course, readers with long memories will remember there was a time not that long ago (less than 60 years ago) when the EU didn’t exist and its largest enlargement of member states occurred only in 2004. How did captives function then? By being offshore and utilising the services of a global insurance carrier with local territory presence to write the risk, handle local compliance requirements and reinsure to the captive. It’s a tried and tested model for multinational risks and allows both parties to focus on what they do best. I see this again becoming the captive programme design of choice, especially as the burden imposed by Solvency 2 on European captives is acknowledged. Time to foster relationships with the major carriers, many of whom contain specialist captive units ready to facilitate captive participation. Lloyds of London is set to announce in early 2017 where its EU centric underwriting hub will be established. Maybe there will be a need for several!
Other developments I foresee in 2017 include;
- Continued scrutiny of the captive model in respect of BEPS challenges. The confidence shown by the captive industry that the current operating and governance models are adequate and fit for purpose will be seen to be overstated. Best to review processes, strengthen controls and enhance documentation now.
- The irony of the UK Government building a “light touch” regulatory and fiscal regime to facilitate development of ILS and other alternative insurance structures at a time when it criticises such activity in its overseas dependencies. The UK may ultimately evolve into a direct competitor of these international finance centres mirroring the features that make them so successful such as cell legislation.
- Captive associations being pressurised into closer and more formal means of working together on common issues and international initiatives. Currently the efforts of the industry are fragmented, lacking substance of argument and hence are ineffective. Change of executive personnel at some associations may be the catalyst for closer integration and a common strategy of engagement. There needs to be a clear articulation to external stakeholders of the value of captives, both on a macro and a micro-economic level. Domicile captive associations will be inundated with a surge of regulatory, fiscal and governance demands.
- Whilst the implementation date for Solvency 2 passed with little fanfare and on the surface all is calm. Under the water, I suspect, the feet are paddling furiously. Backfilling of processes and documentation, attention to the asset side of the balance sheet and annual reporting complexities all require attention. We are beginning to see M&A activity as well as exit strategies as the full impact of Solvency 2 is felt by smaller insurers.
- The growth of Chinese captives (both domestically and internationally) will be explosive. There are great opportunities for captive stakeholders who have invested in this sector and can demonstrate international operational best practice to Chinese stakeholders.
But there is no reason for despondency. The captive industry has met challenges before and continues to capture new opportunities, building upon its capacity for reinvention, innovation and flexibility. This is a time for wise heads to give counsel and show leadership. CWC looks forward to playing its part in drawing up the industry’s roadmap to success and facilitating a vibrant industry.
Finally I would like to thank Captive Review for including me as one of the inaugural inductees into its Hall of Fame. I am honoured to be so recognised and look forward to continue contributing to the industry in 2017 and you can read more here
Malcolm Cutts-Watson | January 2017