Sunday, February 10, 2008Captive Insurance

Derek LloydIs it of greater appeal than the name suggests?

According to the latest global statistics there are presently something in the region of 4,000 captive insurance entities licensed and operating from the offshore jurisdictions around the world and as many as 2,000 now domiciled ‘onshore’. The captive insurance industry continues to thrive globally with consistent annual growth and new jurisdictions emerging all the time both ‘offshore’ and ‘onshore’ and with many of the US States now enacting their own, often more restricted, captive insurance legislation.

It may surprise a few to learn that the British Virgin Islands presently enjoys the status of the 3rd largest offshore captive insurance center in the world with around 400 licensed insurance entities domiciled here compared to the likes of Bermuda with 989 and the Cayman Islands with 743, according to the industry statistics for 2006. The term ‘Captive Insurance Company’ or just plain ‘Captive’ is often heard but apart from the public and private sector professionals working within the industry in the BVI, do the rest of us actually know what it is all about? Looking back at some historical media articles from my predecessors, one such item in the BVI Financial Services Review of 2000 alluded to the BVI’s renowned slogan on vehicle registration plates as “Nature’s Little Secrets”, suggesting that it could just as easily read “The Captive World’s Little Secret”.

Times have changed significantly in the intervening period. The International Finance Centre, the Financial Services Commission and the private sector have all worked tirelessly to further promote the attraction of the Territory as a recognized captive domicile on the international stage. Significant time and effort have also been expended in spreading that message outside of the USA, the traditional breeding grounds for parent companies seeking to form a captive entity in this region. Undoubtedly US corporations still provide the backbone of the captive industry in the BVI but recent times have seen greater diversity and expansion into the European, South American and the Far Eastern markets.

So what is the ‘mysterious’ appeal? Whilst one could easily ramble on with lengthy and tedious descriptions of the different types and structures for captive insurance companies, in it’s most basic form a ‘captive’ provides insurance coverage to its owner-parent and/or affiliated companies for insurance risks that are either unavailable in the traditional insurance market or are subject to punitive premium levels from those underwriters.

Many of the captive insurance entities presently licensed and operating from the BVI are ‘Pure Captives’ providing coverage in accordance with the previous definition to the parent company or affiliated bodies although more sophisticated structures are increasingly being attracted to the domicile for a number of reasons.

Owning and operating your own insurance company can bring a wide range of direct practical and financial benefits to the parent company, namely:

Insurance Coverage - Ability to write lines of business not immediately available or economically prohibitive to insure in the traditional insurance market

Cost - Reduced premiums and expenses compared to placement of covers in the mainstream insurance marketplace.

Stability - Premium stability going forward to avoid traditional pricing fluctuations inherent with conventional insurers with the volatility in underwriting created by the so-called ‘soft and hard market’ cycles.                

Control - Protection from industry wide underwriting decisions affecting specific trade sectors.

Estate Planning and Asset Protection - Ability to control own investment income subject to regulatory requirements and the retention of profitable underwriting income otherwise passed on to the shareholders of a conventional insurance company.

Reinsurance – Allows direct access to the re-insurance market on a more cost efficient basis.

Taxation – Certain tax benefits may well apply to the captive structure. However any industry forum, conference, seminar, speech or article will confirm to its audience that a captive entity should never be formed exclusively from a taxation perspective. Inland Revenue Authorities around the world have a habit of ‘moving the goalposts’ with some regularity with regard to the tax status and qualifying criteria for captive entities.

While there may well be direct benefits available to the captive owner and the parent company, indirect advantages can be gained by placing more emphasis on internal risk management procedures and exercising greater control of the parent company’s claim experience and the resultant loss ratio to the captive.

Why domicile in the British Virgin Islands? Since the inception of the original insurance legislation in 1994, and prior to that for a few of the longer standing entities in the territory, the BVI has provided an economically sound and politically stable financial services environment for a wide range of products.

The Insurance Act, 1994 and The Insurance Regulations, 1995 have consistently provided a strong but fair regulatory framework for the establishment and operation of captives and by the time this article has gone to press, the regulatory environment is likely to have been further enhanced and modernized by the enactment of consolidated new insurance legislation.

Bermuda and The Cayman Islands may have historically been chosen as the domicile of choice for the larger multi-national conglomerates and Fortune 500 entities, but the BVI has traditionally been the domicile of choice for the smaller to medium size business companies (“SME’s”). However, in recent years the BVI has not only seen an expansion in the traditional ‘SME’ business but also from the larger international corporations seeking to establish new captive insurance entities here or relocating from other jurisdictions. Specific reasons for relocating to the BVI can be attributed to a user-friendly Regulatory Environment, high quality professional service providers, a competitive Professional & Regulatory Fee structure, and the expeditious licensing application process. In addition, and unlike certain other domiciles, the BVI insurance legislation does not require that the captive entity have local directors, local board meetings, local auditors or local legal representation, all of which have potential time and cost implications.

Undoubtedly many parent-owners of the captive insurance companies will also take the opportunity to enjoy the recreational benefits the British Virgin Islands has to offer. It is common for them to combine a business visit to the territory with a sailing vacation. What is a captive insurance manager?Most casual encounters normally involve the conversational exchange ‘and what do you do for a living?’ to which many replies will come, including the routine ‘lawyer’, ‘accountant’, ‘trust officer’ response. The response “I’m a captive insurance manager’, will usually end any casual conversation at that point.

There are presently 23 Licensed Insurance Management Companies within the BVI and the insurance legislation requires that there must be an insurance manager appointed to each licensed entity in the jurisdiction. The management company must be resident in the territory and provide a fit and proper individual to be approved by the BVI Financial Services Commission (FSC). The Insurance Manager then provides a proactive intermediary role liaising between the captive and FSC from the original license application to the ongoing compliance function carried out on the part of the captive from within the territory.

The ongoing functions of the Captive Insurance Manager encompass a wide range of activity, partially tailored to the individual captive’s needs and partially fulfilling statutory requirements imposed under the insurance legislation. Such functions will include ensuring that any licensed captive entity complies with all its statutory obligations with regard to the retention of books and records in the domicile, the vetting of audited financial statements for the maintenance of adequate solvency margins for the company and a review of the ‘admissible assets’ within the investment portfolio. The Insurance Manager will also liaise with other professional service providers such as the accountants, the actuary, re-insurance brokers and lawyers to ensure the smooth running of the captive operation from within the BVI.

What does the future hold? Despite the aggressive competition from elsewhere in the world, the BVI has continued to move forward each year both in terms of stature and also the number of licensed entities. The consolidated modern insurance legislation in the BVI, the regulatory regime, a competitive cost environment and the availability of a network of high quality professional service providers available in the Territory can only combine to the good for further growth in captive numbers domiciled here.

Oyster Publications Inc, PO box 3369, Road Town Tortola, British Virgin Islands, VG1110