Bermuda: Captive Domicile Of Choice For Latin America

Last Updated: 26 June 2013
Article by Appleby  

Latin America has become an emerging market for Bermuda's world-leading captive insurance industry.

Bermuda's 856 operating captives, which constitute some 14 per cent of the world total, are the most of any captive domicile. While North American and European companies have predominantly used Bermuda for establishing captives as a means of alternative risk control, in recent years Latin America has shown an increased interest in Bermuda. This interest across the region has been driven by increased wealth, family enterprises and large corporate and private businesses.

Approximately two-thirds of all Latin American captives are formed in Bermuda and the island's market share in this sector is increasing as the more sophisticated Latin American businesses are forming captives and almost exclusively look to Bermuda's market for doing so.

Bermuda's principal attractions to Latin American companies looking to form captives are:

  • Reputation: Bermuda is a preferred jurisdiction for international business and its global client base includes the majority of FTSE 100/Fortune 500 companies due to its reputation as a successful, credible and transparent offshore financial services centre.
  • Stable Political and Economic Climate: Bermuda has a long history of political, economic and social stability.
  • Large Reinsurance Market (second to New York City and London): Bermuda is home to approximately 90 commercial insurance companies with total assets of US$524.7bn. It has a Moody's rating of Aa2-Stable and S&P rating of AA-Stable.
  • Wealth of Intellectual Capital: Several experienced brokers and captive insurance managers have a physical presence on the island, more than 450 attorneys are admitted to the Bermuda Bar and the 'Big Four' accounting firms have been in Bermuda for more than 40 years.

While captives were traditionally established to provide customised solutions for risk financing needs that were not available in the commercial insurance market, many companies within Latin America recognise that a well-structured and managed captive can provide significant benefits to a company.

Reducing the cost of risk management, and thereby contributing to a healthier bottom line, is one of the benefits of setting up a captive. By self-insuring, a captive owner eliminates a good portion of a traditional insurer's acquisition costs (including marketing costs and commissions paid to brokers), administration costs, overheads and other expenses, and the insurer's profits.

Captives also allow a company to stabilise its pricing. Where the insured enjoys a stable and reasonable loss experience from year to year, a captive affords the ability to price insurance cover accordingly.

Captives provide companies with access to reinsurance/capital markets. Because reinsurers generally only deal with insurance companies, a captive affords direct access to the international reinsurance markets, thereby bypassing the frictional costs of the primary insurance companies.

Cash flow benefits improve as the ability of a captive to generate investment income from unearned premiums received is often a critical advantage of forming a captive. This is especially so where the premiums are paid in advance and losses are paid out over a lengthy period of time.

For all practical purposes, a captive has complete freedom to insure any risk it chooses and to customise the terms and conditions of its policies, thereby serving as a customised insurance programme while also establishing its own claims handling policies and procedures.

To the extent that a captive might offer insurance cover to unrelated customers, it will have diversified into open market operations not unlike conventional insurers. In doing so, it will have the potential to generate additional profits for its parent.

While specific tax advice should be sought in the parent company's domicile before taking the decision to form a captive, there may be certain tax advantages associated with such a decision. These might include the tax-free accumulation of underwriting and investment income (depending on the residence or citizenship of the owners or the source of the income) and other factors. However, the conventional wisdom is that captives should be used as true risk transfer vehicles, not primarily for tax reasons.

With 16 of the 35 largest insurers in the world domiciled here, and nearly 1000 of the best companies having active captives in Bermuda, many delegates at the recent Bermuda Captive Conference spoke admiringly about the island's experience, efficiency, transparency and access to unparalleled reinsurance.

With this in mind, Bermuda is well-poised to continue capitalising on its leading position as a captive domicile, particularly with Latin America, which increasingly is turning to the island for its market expertise and solutions.

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.

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