There are over 5,000 captive insurers worldwide and estimates suggest that captive insurance schemes account for approximately 20% of the global corporate spend on property and casualty insurance. The last few years have seen rapid growth in interest in the area of captive insurers some governments and regulators in the Middle East. In the United Arab Emirates, the developments in relation to captive insurance are being led by the Dubai International Financial Centre ("DIFC") which hopes to encourage the development of captive insurance in the region.
What is a Captive Insurance Company?
A Captive Insurer is an insurance company established primarily to primarily insure the risks of its owners or their related entities. The parent shares in the fortune of the captive which can provide both underwriting profit and investment return. The Captive Insurer can be used to provide any conventional insurance coverage and potentially to retain risks that are difficult to insure in the conventional market. A properly designed Captive Insurer provides its insured with the ability to create a risk-financing programme that offers flexibility, stability and control.
Captive Managers
A Captive Insurer is usually managed under contract by third party Captive Manager. The Captive Manager carries out the strategic decisions made by the board of directors and has as much authority as is granted to them under the terms of the management agreement. At the time of writing there are two professional captive managers licensed by the DIFC, Marsh and Kane.
Why Use Captives?
- Improved risk management and control: captives allow greater flexibility in the structuring of the company's insurance programme to match the company's requirements
- Potential tax benefits: reasonable insurance premiums paid to a captive are considered to be a deductible tax expense under the tax regimes of many jurisdictions (as opposed to self-insurance reflected on a balance sheet which is usually not);
- By setting up a Captive Insurer a firm can effectively use underwriting reserves to deal with exceptional claims years. In many instances organizations have experienced financial benefit by doing this through a Captive Insurer as opposed to directly through the firm's balance sheet.
- Retain some or all of the corporate risks within its own group and save the profits that would normally accrue to a commercial Insurer.
- Self-insured deductibles can be retained by the Captive Insurer and entirely funded by the parent through premiums and capital.
- Captive Insurers allow flexibility in the structuring of the insurance programme and can give greater risk control through self-insurance and control of claims handling.
- Captive insurers may be able to offer cover for wider spectrum of risks, some of which may be difficult to place in the commercial market.
- Captive Insurers can offer global consistency and longevity in the structure of insurance programmes.
- Captive Insurers create and alternative market for competitive advantage and a reduction in the dependence of the company upon the commercial insurance market over time.
- Captive Insurers allow for direct access to the lower cost wholesale reinsurance market.
- Claims reserves provide a source of investment income. .
Classes of Captives in the DFIC
The Dubai Financial Services Authority's ("DFSA") Rulebook provides for the authorisation of three classes of Captive Insurer:
Class 1 Captive Insurer
- Is designated for the insurance of risks only from its parent or related companies;
- Requires a minimum capital of US$150,000; and
- Is subject to a lighter prudential regime than a traditional Insurer
Class 2 Captive Insurer
- Is primarily designed for the insurance of risks only from its parent or related companies but may also accept up to 20% of its business from unrelated sources;
- Requires a minimum capital of US$250,000; and
- Is subject to a slightly stricter regulatory regime.
Class 3 Captive Insurer
- A Group Captive Insurer;
- Requires a minimum capital of US$1,000,000; and
- Is subject to a stricter regulatory regime reflecting the standards of a traditional authorised Insurer.
The DFIC also allows the establishment of a Protected Cell Company (PCC) which is a single company consisting of a core and a number of cells that are legally ring-fenced from each other. Each cell has its own assets and can be used to provide captive insurance for either a different company, group of companies or specific type of risk.
- Minimum cellular assets of US$50,000; and
- Minimum non-cellular assets of US$50,000.
Cells of PCC's will operate and need to be authorised as Class 1, Class 2 or Class 3 Captive Insurers.
Other Capital Requirements
Captive Insurers and PCC's, like other Insurers in the DIFC, are subject to risk-based capital requirements. If these calculations lead to a higher figure than the minimum, then this higher figure will apply. For full details of the capital requirements, please refer to the PIN in the DFSA Rulebook available on the DFSA website at www.dfsa.ae.
The Market Opportunity
The Captive insurance industry in the Middle East has enormous development potential. Some of the factors that will be driving this growth include the:
- privatisation of state assets, resulting in previously uninsured risks that now require insurance cover;
- introduction of compulsory insurance covers; and
- increased captive insurance awareness. DIFC has set out to create a global hub to foster the development of a thriving regional captive insurance industry by attracting global insurance and reinsurance companies, brokers, Insurance Managers, actuaries, as well as educational and training providers.
DIFC also seeks to raise the profile of the regional captive insurance industry by creating awareness for Enterprise Risk Management, Alternative Risk Transfer and promoting the benefits derived from the establishment of Captive Insurers.
What DIFC Can Offer
DIFC offers a unique gateway to regional market opportunities and offers its participants a highly attractive operative environment, including:
- 100 per cent foreign ownership;
- zero per cent tax rate on income and profits;
- wide network of double taxation treaties available to UAE incorporated entities;
- dollar denominated environment;
- no restrictions on foreign exchange or capital/profit repatriation;
- an internationally accepted legal system;
- high standards of rules and regulations;
- a world class independent regulator;
- strict supervision and enforcement of money laundering laws;
- an international stock exchange with primary and secondary listings of debt, equity and sukuk instruments;
- ultra modern office accommodation, state-of-the-art technology, sophisticated infrastructure, data protection/security, operational support and business continuity facilities of uncompromisingly high standards; and
- a responsive one-stop-shop service for visas, work permits and other related requirements.
Conclusion
There is little doubt that a strong business case exists for large companies to take advantage of captives and that there is locally based expertise and the regulatory regime present in the DIFC, which offers advantages and cost savings to these companies. The regional captive industry has made important strides in recent years and the development of a captive framework by governments, regulators and captive industry experts have assisted a great deal in the success of the captive industry in the DIFC.
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.
