By Ricardo Knight, President & CEO, JLT Barbados and Kirk Cyrus, Executive Vice President, JLT Barbados
The total number of captives worldwide was 6,618 at 31 December 2016, of which 3,192 (48%) are registered in the United States, 2,417 (37%) in Bermuda and the Caribbean, 841 (13%) in Europe and 148 (2%) in Asia Pacific, according to the May 2017 edition of ‘Captive Review’ magazine in their annual publication on domiciles and captive statistics.
A captive, like every insurer, benefits from diversification of its portfolio, but operates more efficiently than the insurance market for primary risk layers. These are the low severity, medium-to-high frequency losses, with typical savings as much as 25%, depending on the type of risk. It is now commonplace for captives to participate in varied global programmes and lines, including property, damage and non-damage business interruption; recall, products and general liability; environmental impairment; marine cargo and inland transit; automobile and personal damage; trade credit; and employee benefits – including life, disability and medical.
Whilst cyber coverage is growing in complexity and capacity, most companies’ principal needs for cyber coverage are more likely to be based upon loss of intellectual property (IP) and reputational loss/damage arising from IP or sensitive data, than notification based coverage. A captive can facilitate a tailored design of risk transfer coverage for a company, which can then be formalised through a policy form and placed in a captive to develop loss experience, so as to support a commercial underwriter’s participation in the coverage in future years.
Brand Damage and Reputation
Responsibility for protection of brand reputation rests with the corporate board, including mitigation through insurance. The role of insurance in the process will depend on how management views reputational risk. The task is designing a programme that closely fits the identified risks, but it may be possible to transfer separate aspects of the risk across different insurance products – including cyber, property damage, business interruption, errors and omissions, etc. The key to development in this area is the extent to which this risk is integrated into existing risk management arrangements or business lines.
The recommendation from the industry will always be to establish the captive in an international financial centre (IFC), such as Barbados, that allows maximum flexibility for business development, while minimising ongoing costs.
In recent years, there has been consideration of US “onshore” domiciles and those in the EU such as Ireland, Luxembourg and Malta. Outside of the USA, captive growth has been evidenced in Bermuda and the Caribbean, while business activity in Guernsey for non-EU domiciles has continued at a steady pace.The main advantage of EU jurisdictions has been the ability to directly underwrite risk into other EU/EEA member countries.
Other factors to be considered when choosing a domicile, using Barbados as an example, include:
• International Accreditation – Renowned as one of the premier holiday destinations in the Caribbean, Barbados is recognised by the United Nations as one of the top developing nations in the world, with a reputation for its integrity as an IFC.
• Longevity and Track Record – The domicile has its genesis since 1983 with 266 captives on record (at December 2017), and a stated objective of providing a high quality and right-sized domicile through its extensive treaty network. This comprises 39 double taxation agreements (10 with CARICOM) and nine bilateral investment treaties in force, as well as, five tax information exchange agreements.
• Flexibility of Insurance Regulation – In Barbados, direct writing is allowed when a group may want to use a captive to incubate emerging or difficult-to-insure risks. This may not be the case with every domicile – in Luxembourg, for example, requests to form direct captive insurance companies without a reinsurance affiliate are typically declined by the authorities.
• Solvency II – Though Barbados is not presently seeking Solvency II equivalency, other domiciles are. Captive owners need to understand that Solvency II equivalent domiciles bring with them more stringent capital, governance and regulatory reporting requirements.
• Base Erosion and Profit Shifting (BEPS) – Barbados has officially joined the “Inclusive Framework on BEPS”, pledging to implement measures aimed at preventing tax avoidance by multinationals and improving tax dispute resolution. The likelihood exists that captives which are regulated under a Solvency II regime could have an advantage in tackling the action items set out by the OECD/G20 BEPSProject .
Barbados remains one of the largest global captive insurance domiciles, with a well-regulated business environment, excellent infrastructure, modern legislation and an expanding treaty network. As the captive insurance industry continues to expand, it is anticipated that IFCs such as Barbados must develop a niche strategy within the limitations of a new world order requiring more onerous governance and regulation. Barbados, as always, remains open for business, recognising its commitment as a world class domicile for the niche captive insurance market.