Fiona Le Poidevin of Guernsey Finance looks at why captive insurance is becoming more common in Latin America and what makes Guernsey a suitable captive insurance domicile.
The use of captives as a risk management tool is becoming increasingly common in Latin America.
Sophisticated Latin American businesses now recognise that a well-structured and managed captive – which in its purest form is set up by its owners to insure the risks of its parent and/or fellow subsidiaries – can provide a wide range of benefits to a company not commonly obtained through the commercial market. Furthermore, it is worth pointing out that captive insurance is not only used by the larger public companies but also by small and mid-tier private organisations.
Just some of the advantages include:
- The insuring of unusual or catastrophic risks or multiple small risks
- Avoids paying large overheads and profit margins
- Premiums relate to the insured's previous claims record
- Direct access to the wholesale reinsurance market
- Benefit from the investment return on retained premiums
- The retention within the group of the excess of net premiums over claims
- Taxation efficiencies - the payment of insurance premiums is deductible in arriving at taxable profits and receipt is at the group's off shore captive
- Improved risk management and understanding of the cost of risk
In addition, cash flow benefits improve as the captive has the ability to generate investment income from unearned premiums. This is especially so where the premiums are paid in advance and losses are paid out over a lengthy period of time.
Guernsey is perfectly positioned to provide these benefits as the island has a long and strong history as a captive insurance domicile – when the first captive insurance company was established in 1922.
Indeed, Guernsey is now the largest captive domicile in Europe and the fourth biggest globally, with figures from the Guernsey Financial Services Commission (GFSC) showing that there were 790 licensed international insurers in Guernsey at the end of March 2014 – an increase of 99 over the preceding 12 months. This means Guernsey is vastly experienced in the provision of captive insurance services in the UK, European and US markets, but we have also dipped our toes into Latin America. For example, a Colombian parent company is currently utilising a Guernsey captive structure to primarily insure its Colombian risks but also risks originating in other Latin American countries.
Our experience is that the ease with which it is possible to attract further captive insurance business from emerging markets is largely dictated by their stage of economic maturity. Within Latin America, it seems that the sophistication of the market is important but also that a country is comfortable with cross-border trade.
For example, on a recent visit to South America, it became apparent that Chile, Colombia and Peru's membership of the Pacific Alliance, along with Mexico, means that they are well-versed in cross-border trade and therefore much more open to the concept of captive insurance. Indeed, Latin American firms are already using captives established internationally in domiciles such as Guernsey and that trend looks set to develop further as the region increasingly adopts an international business culture.
In some jurisdictions where there is a more insular approach to doing business the local legislators may decide to introduce domestic captive legislation. Yet, what we envisage is that firms from these countries will insure their local risks in a domestic captive but once they become more comfortable with the concept and expand internationally they will understand the need to manage risk more effectively and wish to establish a vehicle in Guernsey to cover their global risk base (ex-South America). This would be in a similar vein to the way large US multinationals often have a captive on that side of the Atlantic for their US risks and another in Europe for their rest-of-world risks.
Internationally expanding firms from Latin America cannot just rely on a domestic captive regime (if it exists) to cover their global risks because there will simply not be the experience and expertise that is available in a jurisdiction such as Guernsey.
Guernsey really began making its mark with captive insurance when it pioneered the cell company concept in 1997 with the introduction of the protected cell company (PCC) for use specifically in the insurance sector. The PCC, sometimes referred to as a segregated cell company, is a single legal entity made up of a core and any number of cells. The cells are separate and distinct from each other and most importantly the assets and liabilities of each cell are legally segregated from all other cells and the core.
The concept allows a client to 'rent' a cell of an existing structure rather than establish an entirely new, conventional limited company. This approach carries with it distinct benefits such as flexibility and cost efficiencies. As well as adopting the similarly innovative incorporated cell company (ICC), Guernsey has, through legislative advancements, developed a regulatory infrastructure that enables them to be widely employed. An example of Guernsey's innovation and expertise in the cell structure field includes Aon's White Rock Insurance Company PCC Limited, which was established in Guernsey as the first PCC in the world. Since inception it has been used by more than 50 corporations as a cell captive facility and grown to be the largest structure of its kind globally.
Global captive player
Our long-standing heritage in the captives and cell structuring arena has helped Guernsey grow and means we now play host to subsidiaries of major risk management companies such as AIG, Aon, Artex, Generali, Hiscox, Jardine Lloyd Thompson, Marsh, Old Mutual, Royal & Sun Alliance, SCOR and Willis, as well as independent, boutique operators such as Alternative Risk Management (ARM), Hepburns Insurance, Kane and Robus. This strength is underlined by the fact that approximately 40% of the leading 100 companies on the London Stock Exchange (LSE) with captives have them domiciled in Guernsey.
However, the island's insurance sector is truly international. In addition to captives from Europe and the US, Guernsey also boasts parent owners from South Africa, Australia, Asia, the Middle East and the Caribbean. Oil giant BP has its captive insurance company, Jupiter Insurance, domiciled in Guernsey, as does global mining company BHP Billiton through Stein Insurance Company. Supermarket leader Tesco as well as UK Government-owned entities such as Network Rail and Transport for London are other notable organisations with Guernsey captives.
We do not expect to create the same bedrock of captive clients in Latin America overnight and recognise that expansion of our insurance services into the region is a long-term challenge. Yet, we see great potential in Latin America as many of the countries are already sufficiently sophisticated and open enough to allow risks to be written internationally. What also adds to Guernsey's captive offering is that it has cultivated a conducive legal, regulatory and tax environment. Guernsey's regulator, the GFSC, adopts world-class regulatory standards while being flexible and pragmatic. For example, Guernsey has decided not to seek equivalence with the EU's Solvency II regulatory regime for insurance but instead follow the Insurance Core Principles of the International Association. In addition, in 2011, the IMF reported Guernsey as being compliant or largely compliant with 47 out of 49 of the FATF recommendations on anti-money laundering (AML) and countering the financing of terrorism (CFT); the highest standard of any jurisdiction so far assessed.
Guernsey was also within the first wave of jurisdictions placed on the OECD/G20 'white list' in April 2009 and today Guernsey has signed tax information exchange agreements (TIEAs) with 55 jurisdictions, including Brazil, Chile and Mexico. Further, Guernsey also continues to extend its network of double tax arrangements (DTAs) and has signed with 23 jurisdictions.
Companies in the UK, Europe and the US have used captives for many years as a specialist form of insurance, but we can also recognise that the concept of captive insurance is starting to evolve in Latin America too. Companies there are becoming multinational which means they will need to look for solutions beyond the domestic market and Guernsey offers the right environment for establishing a captive to insure risks both in and outside of Latin America.
- Situated in Europe between the United Kingdom (UK) and France.
- A British Crown Dependency
- Special relationship with the European Union (EU)
- Population of 60,000 people
- English speaking
- Currency: British pound sterling (GBP)
- Same time zone as the UK
- Links to both London and wider Europe
An original version of this article was published in the July edition of LatAm Insurance Review.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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