Did you know that the British Virgin Islands is the fourth largest offshore domicile for captive insurance companies in the world? Probably not. If people do know anything about BVI it is usually that it is the largest sailing charter centre in the world, that it has a lovely climate and that it has some of the most beautiful beaches in the Caribbean. You may even know that Richard Branson of Virgin Atlantic owns one of BVI’s islands.
For those of you who are more interested in what actually makes BVI tick and what makes it so special and unique, then just peep below the surface of BVI’s turquoise waters and brush aside some soft sand and you will discover a whole new type of paradise.
You will soon discover that BVI is home to more than 500,000 International Business Companies (IBCs).
An IBC is a corporate vehicle having limited liability, which, provided it has no business activities in the British Virgin Islands, is wholly exempt from BVI tax on its income and from inheritance or estate tax on its shares. Only a nominal annual fee is payable to the Government (in most cases US$300). An IBC can have bank accounts in the BVI, deal with lawyers, accountants, trust companies and other professionals in the BVI, hold company meetings and keep its accounting books and records in the BVI without breaching this restriction. By incorporating in the BVI, a business gains a wide range of competitive advantages, including:
- Exemption from all local taxes and stamp duty
- Flexible and creative corporate structures for international businesses
- Access to experienced and trustworthy local industry professionals
- Highly competitive government and registered agent fees and costs
Examples as to what IBCs are used for include trading or holding companies, mutual funds or insurance companies. The substantial fees generated by the IBCs since they were introduced to BVI in the 1980s, has differentiated the BVI from many of its Caribbean neighbours where tourism is the main source of income. This extra string to BVI’s bow means that it has not had to sell its soul to the tourist dollar in order to pay for its schools, roads, electricity etc. Furthermore, the income generated from financial services has made BV Islanders some of the best well off in the region.
The finance industry, with its IBC backbone, includes mutual funds, trusts, ships registry and, of course, its Virgin Captives.
Since the government introduced the Insurance Act, 1994, the territory has been a magnet for small to medium sized companies looking for cost-effective solutions to their risk management and risk financing problems. These companies, numbering over 300 at the moment, have discovered that a captive insurance company in BVI is just what they were looking for.
What is Captive Insurance?
A captive insurance company is one which has been set up primarily to insure the risks of its parent company. In other words, it’s like having your very own insurance company, so that when you pay the insurance premiums, you’re paying yourself rather than somebody else. The obvious benefit of this is that if you don’t have any losses then you keep all the premium. Captives then often buy their own wholesale insurance or reinsurance to protect themselves, which costs less than normal insurance.
From this simple explanation it’s clear to see that captives work best with companies which have good control over their claims, i.e. those organisations which have good risk management processes in place. The more profitable the captive is, the more risk it can retain itself, and so further reduce its insurance costs.
The rate of growth of captive formation is directly related to the underwriting cycle of the insurance market. When the insurance industry is profitable there is a lot of competition for your business, and insurance rates fall. However, when insurers suffer a series of large losses such as those resulting from terrorism, hurricanes or financial scandals, like Enron, they start to lose money and immediately increase insurance premiums. To make matters worse, insurers invest huge amounts of their funds (our premiums) in the stock exchange, and when that falls, so too does the value of the insurance companies.
All in all, insurance companies have been suffering recently, and this will explain why your insurance premiums continue to go up – even if you haven’t had any claims.
This environment has encouraged buyers of insurance to consider alternatives, and captives have proved to be one of the most cost-effective alternatives available. Some people will tell you that the worst is over for insurance companies and that insurance premiums will soon get back to normal. However, this is difficult to believe when you keep on reading about yet another hurricane to hit Florida. I don’t think we can expect insurers to be softening just yet.
At the end of the day, a captive is really a sophisticated way to reduce the amount of insurance you pay to somebody else, and also a way to build up a fund for a rainy day. Having said that, a proper registered and regulated captive insurance company may also offer a number of important tax advantages. You should mention this captive concept to your tax advisor, who should be familiar with it. Please refer to Chris Riser’s article on the tax advantages of captives.
BVI’s Captive Market
Over 50% of the US Fortune 500 companies have their own captives, and the vast majority of these are based in Bermuda, the largest of all captive centers. In Europe most of the large captives are based in Guernsey.
For many years both Bermuda and Guernsey really had a monopoly of the business, and Cayman and Vermont only joined in about when Bermuda started turning business away and became too expensive.
BVI on the other hand has never tried to compete with Bermuda. It recognised very early on in its development that there is a virtually untapped market in the US for small to medium sized companies who appreciate the advantages of captives, but at the same time wanted value for money.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
