With Asian companies on the verge of embracing the use of captives as a form of risk management and transfer, leading to an explosion in their use, Labuan IBFC is well positioned as the domicile that could benefit most from this, as Danial Mah Abdullah, its chief executive, tells EMEA Captive.
In the US, more than 90 percent of Fortune 1000 companies own a captive in some shape or form. In Asia-Pacific, this figure is closer to 15 percent of the region's bigger companies, and there are huge regional variations within this. A tried and tested risk transfer mechanism in developed markets, the use of captives and protected cell companies (PCCs) in many emerging economies is expected to boom in the coming years.
This is the long-term picture and, as such, is only part of the optimism of Danial Mah Abdullah, chief executive of Labuan International Business and Financial Centre (Labuan IBFC) in Malaysia, one of the biggest and fastest-growing domiciles in Asia-Pacific for captives. Mah foresees many positives for the captives sector in the region in both the short and the long term.
"I firmly believe that the potential for captives to grow in Asia is enormous," he says. "Captive insurance is one of the niches that we have identified as a focus area in 2017. Focusing on niche areas with high growth potential is a concerted effort to further refine the midshore concept.
"Penetration levels at the moment are low yet many Asian companies are becoming very sophisticated in the way they approach risk transfer. It is only a matter of time before there is an explosion of captives use in Asia."
A healthy growth rate
To give a sense of the size of Labuan IBFC as a domicile, as of October 2016 it had 41 captive insurance companies (including PCCs). This was on the back of a solid year of growth in 2015 when it licensed three new captive insurers and five protected cells, while the gross written premiums for captive insurance business increased by 4 percent to $355.9 million in 2015, compared with $341.6 million in 2014.
The captives based in Labuan IBFC are mainly owned by Asian companies. Almost 75 percent of its captives are from Asia- Pacific; other companies from Europe and the US account for the rest. In terms of the type of company using captives based there, the engineering sector contributes the highest market share of 59.3 percent of the total gross premiums. Other lines including catastrophic and professional indemnity risks accounted for 28.9 percent while fire (8 percent), marine (4 percent) and motors (0.1 percent) made up the rest.
"There is a growing awareness around the benefits of captives in Asia, which Labuan IBFC is benefiting from, as more companies look to use the risk transfer tool as a complement the traditional insurance," says Mah.
"Asia is seeing a growing interest for captive insurance and PCCs as a self-risk management solution."
He says more companies that prefer to have the flexibility of managing their own perils as part of their own risk management are looking at using unique underwriting vehicles in the form of captives as risk solutions.
The growth of captives in Labuan IBFC is precipitated by increasing demand from Malaysian risk owners who seek cost-effective and flexible solutions to managing their own risks, especially as their businesses mature and a cross-border risk profile emerges, the CEO adds.
"Growing interest in captives has also been seen from among the developing ASEAN economies, in tandem with their increasing economic growth," he says.
Labuan IBFC has specifically seen heightened interest from ASEAN corporates as well as Japanese companies looking for an alternative jurisdiction, especially in light of more stringent tax transparency requirements that are expected to be introduced globally, which assess whether companies have a substantive presence in domiciles in which they base certain operations—such as captives.
The new rules, being crystallised under the OECD's base erosion and profit shifting (BEPS) report, are designed to stop companies avoiding taxes but by default also cover areas including risk transfer, and thus captives.
Partly because of these potential new laws, Labuan IBFC is also seeing an increase of interest from current captive owners who are considering redomiciling their captives there.
"We are able to offer a substance-enabling operating environment, which is what will be needed in the not-too-distant future once the changes to the international tax landscape kick in," Mah says.
"BEPS will focus on whether a company has a tangible and physical presence in a domicile, which will really work in our favour," he says.
"It also helps that we have a very robust infrastructure in place with insurers, reinsurers, brokers, banks, legal firms and accountants all here. In short, there is a strong risk management ecosystem in place to support captives in Labuan IBFC. The fact that Labuan is BEPS-compliant and is a substance-enabling jurisdiction is really the icing on the cake."
"Because of the changes in the landscape of international tax, it's more natural for an Asian company to have a domicile closer to home, in order to facilitate substance creation."
A robust framework
Mah stresses that one of the biggest benefits the domicile has is its robust and internationally recognised regulatory framework, which includes clear legal provisions and industry guidelines provided and enforced by the Labuan Financial Services Authority (FSA).
On top of this, it offers a facilitative and business-friendly legislation: businesses in Labuan are governed by eight modern acts, including the Labuan Islamic Financial Services and Securities Act 2010, which is the world's first omnibus legislation governing all shariah-compliant financial services in an international business and financial centre.
"This Islamic Act has allowed Islamic finance to thrive and Labuan IBFC is home to the world's only takaful captive, introduced in 2015," Mah says.
This is complemented by the competitive tax structure and various tax exemptions the domicile offers, as well as access to the majority of Malaysia's extensive network of more than 80 double-taxation treaties, he adds.
"Labuan IBFC is a cost-efficient substance-enabling jurisdiction, located in the heart of Asia, straddling the working time zones from the Gulf all the way to Japan," he says.
This geographic location is important for both time zones and talent. While Labuan shares the same time zone with major cities in the region, such as Hong Kong, Shanghai and Singapore, which makes business dealings much more convenient, a ready and well educated, English-speaking talent pool is also available, making Labuan IBFC a feasible option for Asian companies and insurers.
"The fact that all Labuan insurance or risk management related licensees are able to set up operations in Kuala Lumpur (Malaysia's capital) has made the Labuan proposition even more attractive," Mah says.
The domicile also offers some specific regulations that allow certain types of business to flourish. One is the use of PCC structures, a risk management tool gaining popularity among companies globally.
"The Labuan PCC structure is gaining popularity as we receive continued interest from businesses in the region. In fact, it is a flexible structure that can be used for a number of different purposes. A PCC is not limited to risk management as this solution also avails itself to fund management needs," Mah explains.
"The availability of this structure enables Labuan IBFC to offer a more complete solution to businesses as a midshore jurisdiction.
"A Labuan PCC may operate in a conventional system or in accordance with Islamic principles, by ensuring compliance in all its dealings," he says. "As such, PCCs relating to takaful, Islamic captives and Islamic funds is a sector that is gaining traction. Recently, a Sri Lankan captive was set up according to Islamic principles to conduct micro finance/credit-related activities."
Mah sees great potential in the Islamic finance legislation. "No other jurisdiction offers anything like this. We have a handful of units up and running, but a lot of interest in the pipeline. As people become aware of it, it will gain more traction. There is education that needs to take place but we are very excited about it."
The benefit of transparency
Turning his thoughts to the future, Mah says that the shift in sentiment and regulation globally towards greater transparency will benefit the domicile in the long term and it is open to sharing information.
He notes that as of 2015, a total of 42 requests for exchange of information were facilitated by the Labuan FSA. A new memorandum of understanding was also sealed with Cayman Islands Monetary Authority to foster great efficiency in mutual assistance.
"We see most of the regulatory agreements which are on our agenda and on the global agenda as a benefit to us," he says. "For instance, we welcome the development of greater transparency and effective exchange of information across all international financial centres as there are now heightened demands for that.
"In fact, the adverse focus on traditional offshore financial centres to some extent has allowed Labuan IBFC to stand out as one of the centres that abides to the international standards and best practice of good governance and transparency.
"As part of Malaysia, we are committed to the global standards and requirements on transparency and exchange of information, but at the same time providing a business-friendly operating environment."
He adds that to further enhance the competitiveness of the centre, a review of Labuan IBFC's tax system was initiated in 2016, while a broader legal enhancement of the Labuan laws is also expected to be completed by the end of 2017.
Complementing these regulatory efforts, Labuan FSA has developed a plan designed to achieve greater diversification to sustain the development of Labuan IBFC, in fact an Asian-focused captives conference is in the plan for 2017, in a bid to reinforce Labuan IBFC's leading position in the region.
In addition to this, in order to match the development of the Labuan captives sector, macro planning is needed vis-ŕ-vis the expanding demand for self-insurance vehicles.
He adds that the domicile has always been agile, which has been an important part of its success, as has its role complementary to Hong Kong and Singapore's financial infrastructure.
"Moving forward, Labuan IBFC will continue to be shaped by the shifting financial market dynamics and financial development globally, underpinned by the ASEAN Economic Community and integration with new business opportunities opening up for investors, and this will include the captives business.
"We are confident that Labuan IBFC has the potential to fulfil the financial and business needs of the regional economic community," Mah concludes.
This article was first published in EMEA Captive 2017.
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.