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Features - July 2008

 

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Revitalizing captive insurance

Revitalizing captive insurance

Niche market offers definite advantages

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The Bahamas Investor Magazine
July 3, 2008
July 3, 2008
Joel J Karp and Benno Räber

At one time The Bahamas was in the pole position to take advantage of the benefits connected with the captive insurance industry. In recent years, however, competitors such as Bermuda have pulled ahead. But it doesn’t have to stay that way.

Captive insurance is a method whereby business establishments can reduce their insurance cost, expand the coverage available to them and at the same time do it in a tax-efficient manner, at least insofar as the US and other taxing jurisdictions are concerned. It represents a method of increasing funds under management and in a way that creates permanent customers for financial institutions. The Bahamas already has the resources in place to expand its importance in this field and the rewards could be substantial.

As far as captive insurance is concerned, The Bahamas is not Bermuda. Nevertheless, you don’t have to make it large to make it big. Both Bermuda and The Cayman Islands are discouraging certain types of businesses and focusing on companies with huge capitalization. As in the US and potentially in Latin America, smaller companies can create a lot of business. This is particularly true in the captive insurance industry because it is generally organized by companies or other groups or individuals that have a relationship with one another and are working together to attain more comprehensive, more tax-efficient and less expensive insurance services.

The Bahamas’ domestic insurance industry is perfectly positioned to develop the captive insurance sector as external insurance business cannot develop without insurance expertise. One option is to nurture joint ventures between local insurance companies, banks and trust companies looking to the corporate and funds investment aspect of the development of the business.

But what exactly is captive insurance? Basically, it is a method by which companies or other groups create, in effect, their own insurance company. They provide the policies to related parties that offer the coverage desired. The captive insurance company created reinsures risks, which it does not wish to retain with larger reinsurance companies, at wholesale rather than retail insurance premium rates. The balance of the risk it can retain itself. The net premiums written over and above reinsurance cost are placed in reserves. The reserves are invested on behalf of the captive by local banks and investment advisors engaged for that purpose. If and when there are claims, the captive pays the claims by using its reserves and calling on its reinsurance.

Types of captives
There are basically three types of captives: pure, association and professional.

The pure captive is a captive created by a consolidated group of industrial or commercial companies primarily to insure internal risks.

An association captive is a captive created by a group of cooperating, independent enterprises or professional groups engaged in the same or similar business to provide insurance coverage at more reasonable rates or where coverage does not otherwise exist. An example of this type of captive would be an insurance company created under the auspices of a medical or law society, for example, to provide professional coverage for malpractice, errors and omissions, and similar types of coverages.

The third type of captive can be referred to as the professional captive. Insurance brokers may create captives to carry part of a client’s risks, which they know may never attract claims.

Why The Bahamas for captives?
One of the things that makes The Bahamas so potentially attractive for the development and expansion of a captive insurance industry is geography: its accessibility from the US and South America. There is also the perception by the world of The Bahamas not only as a financial centre but also as a prime vacation destination.

Since captive insurance companies are normally not regulated in any jurisdiction other than the place in which they are organized, insurance policies and negotiations must be seen to be carried out in the country of organization, ie The Bahamas. For companies in the western hemisphere, ease of access to the jurisdiction is a real plus.

A major source of captive insurance business, of course, is the primary insurance advisory concerns of the world, such as AON, Marsh, among others. However, there are smaller companies in the insurance management business that are not necessarily wedded to any particular jurisdiction. These companies are looking at the cost of company organization and operation relative to other jurisdictions, as well as the presence locally of some level of insurance expertise. For The Bahamas, cost and geographic accessibility can really help the jurisdiction develop as a player in the sector.

In addition, banks and trust companies in other countries have developed their own facilities for providing insurance services. This makes it possible for banks and insurance companies to provide the necessary insurance services, especially in tandem with local domestic insurance groups, to build a captive insurance book of business. In this respect, there is no reason why local securities, brokerage and investment advisory groups could not establish their own captive management companies by creating a joint venture with one or more persons with insurance expertise. Since the insurance products are not suitable for the domestic market, these activities do not hurt local business. Indeed, these activities provide new outlets for local expertise. The US experience has been that banks and securities firms would rather develop working relationships with existing insurance managers than develop ‘in-house’ expertise.

Latin America
One area of great flexibility and growth for captive insurance companies may be in Latin America. Slowly but surely compliance tax planning is beginning to take root in various Latin American countries that have begun slowly to enforce and articulate their tax rules and policies. Interestingly, however, as with many other countries in western Europe, Latin America historically (when there was any tax enforcement at all) assumed that offshore tax planning would be prevented by exchange control. With the disappearance of exchange control in most countries in Latin America, circumstances exist for a highly flexible and liberal programme of tax planning in connection with captive insurance.

The Bahamas Financial Services Board, in association with the Ministry of Finance, has been working to bring The Bahamas’ External Insurance Act to a high level. This could form a basis for an inexpensive and efficient administration to facilitate the quick and reasonably priced licence creation and licensing of captive insurance companies in The Bahamas.

This legislation should soon be enacted and will provide the institutional framework within which a captive insurance industry can grow. However, such an industry will never come about without vigorous promotion on the part of the government, coupled with the cooperation of the financial services sector.

Bio
Benno Räber
Benno K Räber is an attorney at law and Principal of Prime Advisory Group, a Swiss-based company with a subsidiary in The Bahamas. He specializes in risk management and strategic insurance planning for private clients. Räber holds a law degree of the University of St Gallen (Switzerland) and New York University (LLM). He worked for Shearman & Sterling LLP in New York and was the CEO of two private placement life insurance companies. Räber is involved in various international insurance ventures as advisor and principal. Email br@primeadvisorygroup.com

Bio
Joel J Karp
Joel J Karp is the managing partner of Miami-based law firm Joel J Karp, PA, specializing in international tax, business planning and compliance as well as estate tax. He is a member of the American, New York and Florida Bar Associations and the International Law Advisory Committee. Karp has been special advisor to The Bahamas relating to the External Insurance (Amendments) Act, 1996 and the proposed External Insurance Act, 2008. He is a well-known author and lectures on international tax matters.

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