In the final of a two-part series (October and December),
captive insurance stalwart, Callum Beaton talks about the trends of
the captive industry and what it entails
Captive insurance is still a forward-looking concept in the
region and as Callum Beaton pointed out in the October issue of
Insight Plus, Asia is "the big growth area" for
captives and it is a matter of "be part of it or miss
In the final part of the series (read the first parthere) he talks to us about the latest industry
developments and the impact of these changes in the global tax
IP: What are the latest developments in the industry,
e.g. if micro captive is taking off and what other trends in the
CB: I think one has to step back and ask what
the industry is; the insurance sector is notorious for reinventing
terms to describe the same thing. To me, the term micro-captive is
synonymous with ultra-low risk ventures, in some cases arguably
uninsurable, and tax benefits afforded particularly in certain US
states. Personally, I don't consider it to have earned a full
and proper place in the captive vocabulary.
The same may apply to Insurance Linked Securities although they
are significantly favoured in Bermuda and Guernsey at the present
time. Do they represent a development in the captive sector? On
balance yes, because the use of these securities offers a
mechanism, through incorporated cells, to facilitate investment
directly into insurance risk. The risk, such as it is, is fully
collateralised and, ultimately an investor will either receive
enhanced returns or lose all capital invested. Such approaches are
therefore for sophisticated investors and not individuals seeking
greater returns. What does present is an interesting means to
introduce capacity on high value specific risks and a convergence
of investment and insurance markets to provide delivery.
IP: Do you think the changes in global tax landscape and
this move towards tax transparency will change the landscape of
CB: It should not, but undoubtedly will. Direct
premium taxes have, in many territories, removed the immediate
benefits afforded by the captive writing deductible programmes, but
these taxes are payable by insured parties based on the situation
of risk. Generally, captives are tax free but tax is payable on
distribution of profit to the parent company by the parent company.
In theory, there is scope to manipulate reserves to retain funds in
the captive longer than may be necessary but increasing audit
scrutiny serves to ensure that reserves, considered by captive
boards, are proportionate to the risks carried. There is no logical
reason why a captive should be adversely affected by tax
transparency and many captives owned by public companies are named
in annual reports and in any credible captive jurisdiction, there
will be regulatory requirement, at the very least, to provide full
detail as to beneficial ownership to regulators. Consequently, I
believe that the global changes will impact but by perception alone
as captives are not secret vehicles but credible means of assuming
risk in a cost-effective manner.
IP: Do you think Protected Cell Companies (PCC) would be
considered as a cost-efficient alternative to Captives in Asia and
as such assist in the take-up of self-insurance?
CB: I will turn the question around: why wouldn't they be?
Cells in PCCs have, in the last decade presented the major growth
area for delivery of captive insurance techniques. Once
established, the promoter assumes director/management
responsibilities and provides services to the cell owner. Costs are
lower, and so they should be. However, I have previously described
the PCC as the "offshore trust of the insurance world";
it is therefore a matter for a would-be owner to determine whether
they are happy with the concept or not.
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Asia Pacific based Clyde & Co lawyers answer important questions on the Reinsurance industry.
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