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BVI: The offshore alternative
Simon Owen, chairman of the British Virgin Islands’ Association of Insurance Managers, explores
how the British Virgin Islands captive industry sustains its impressive growth rate year upon year.
April 2006 - BVI International Finance Centre
Last year proved to be yet another interesting year for the insurance and reinsurance industry. Despite the expected softening of rates across the majority of classes, the recent wave of natural disasters has caused a significant slowing of rate reductions. Across a number of lines, particularly in the marine and energy sector, the devastating hurricane season is reported to have caused some rate increases in excess of 350 percent.
Hurricane Katrina’s estimated insurance bill of between $40 and $60 billion proved to be the catalyst that sparked the formation of a plethora of new reinsurance companies, many backed by private equity and hedge funds, hoping to take advantage of those rate increases and those witnessed in other sectors, such as property catastrophe.
Similarly, the captive industry is also looking to capitalise on the uncertainties associated with the commercial markets. In the British Virgin Islands (BVI), we are already seeing an increase in new formations and enquiries, as companies continue to turn to the alternative risk market to provide solutions to long-term problems.
One major factor behind this trend relates to the change in senior management’s attitude to risk. Company CFOs are beginning to realise that the cyclical nature of the commercial insurance markets can have a potentially damaging effect on their business. They are becoming more and more aware that long-term risk strategies, such as captive ownership, offer companies an increased level of control and stability. A recent quote from the chairman of a large US-based insurer encapsulates this theory. He explained that, despite being in the insurance business for 35 years, he is still trying to understand what hard and soft markets are. He believes you should run your business irrespective of market conditions.
The BVI has long been established as a captive domicile and, over the years, has attracted a large number of small single-parent captives. Following a continual period of growth, the jurisdiction attained its current position as one of world’s largest offshore captive domiciles. The domicile certainly is not ready to slow down and continues to evolve. In 2005, the BVI set another record in terms of new formations, ending the year with nearly 400 active captives.
In previous years, the majority of the BVI’s captive growth has come from small- to medium-sized single-parent captives. Whilst they continue to represent a large proportion of the captives formed in the BVI, the Financial Services Commission (FSC), in conjunction with the captive managers in the Territory, has worked diligently to develop the domicile’s Insurance Act to ensure that the BIV is in a position to compete with some of the longer-established domiciles.
The resulting legislation offers policyholders a high level of protection, while remaining flexible and commercial. This gives captive managers the ability to form innovative, sophisticated captive structures on behalf of their clients, and is one of the main reasons the BVI is seeing major changes to its business pattern.
During the last six months, a number of captives have been formed that are expecting to write a high volume of premium, such as agency and association captives. We are seeing a distinct shift in the trend of captives formed here and it is encouraging to know that potential captive owners recognise the diverse range of solutions the BVI has to offer.
In order to continue the BVI’s inexorable growth rate, the expertise and diversity of the domicile’s captive managers remains a key factor. We have attracted a wealth of talent to the BVI in recent years and, whilst we are keen to attract further high-premium volume business, we are careful not to disregard or discourage the smaller, single-parent business that helped build the captive industry in the BVI.
Our consistent growth rate has not only put us on the captive map; in more recent times, it has allowed us to compete with other domiciles from a marketing perspective. The BVI is now well-represented at a number of worldwide industry events and conferences, whereas in previous years, we tended to only be represented at the major captive conferences, such as CICA and RIMS.
The BVI’s International Finance Centre (IFC) continues to be supportive. Their promotion of the domicile’s finance industry to an international audience has also produced positive results. Indeed, the BVI has seen growth in business from regions such as Canada, Mexico, Europe and Oceania, demonstrating the domicile’s global reach.
Some of the growth in new licences can be attributed to the increasing involvement of professionals from the world’s insurance markets with BVI captives. As we expand the services we provide, particularly those afforded to managing general agents and associations, the BVI captive industry has started to work far more closely with the commercial market, including a number of Lloyd’s syndicates, international brokers and fronting insurers. As reputation is crucial in this industry, it is extremely pleasing to see that the larger players recognise the level of expertise and the opportunities that exist here.
Forming relationships with other areas of the industry will be increasingly important if the BVI is to move to the next level. Bermuda has set the standard for the offshore world in that regard. Although it is imperative that we follow a similar path to continue our expansion, with the added benefit of hindsight, we are in the perfect position to learn from the problems other domiciles have encountered in the past and further exemplify the BVI as a premier domicile. The decision taken by the newly-formed specialist reinsurer, Greenlight Re, to domicile in the Cayman Islands and not in Bermuda was an interesting one and, in time, we hope to attract similar vehicles to the BVI.
For certain companies, an offshore captive may not necessarily be the best option. Choosing the right domicile is the most important decision a prospective captive owner will make. Choosing the right manager is the second most important decision. If the formation of an offshore captive is a viable option, the BVI should certainly be at the top of the list.
A number of prospective captive owners come to the BVI having previously investigated other domiciles. They find the first striking difference between the BVI and its competitors is cost. Many are completely taken aback by the considerable cost difference between the BVI licence fees and those of Bermuda, Cayman or Guernsey. In fact, it is probably significantly more cost-effective to set up a stand-alone captive in the BVI than it is to use a rent-a-captive facility or a cell in other domiciles.
Cost is, however, only one of the many benefits the BVI has to offer. The predominant advantage of forming a captive in the BVI is the accessibility of the regulator. In an ever-changing business climate, new opportunities are often missed due to bureaucracy and the inability to react in a timely manner. Our relationship with the regulators in the BVI is second to none and as a result, the Territory’s insurance managers are able to address their clients’ needs accordingly.
In the event that a BVI captive requires the ability to write a new class of business as an opportunity arises, the availability of the regulators allows the captive’s service providers to address their needs accordingly. The BVI regulators are stringent, as they should be; they just combine it with a helpful, commercial attitude.
This has become a key factor for the BVI as a competitive jurisdiction. Offshore legislation has become fairly standard in recent years, but the BVI has the added advantage of its re-domiciliation legislation. This is a legal framework allowing the movement of captives from other regulated environments to the BVI and has become another valuable source of new business.
As more captive domiciles are established all over the world, we continue to anticipate further growth despite the increase in competition. Certainly, it is becoming more and more apparent that some of the new domiciles have a specific customer base in mind. For example, Malta will seemingly be targeting blue-chip companies with operations in various parts of Europe, that would specifically require a non-homogeneous group captive and an EU licence. Although this may impact the likes of Dublin, Gibraltar, Luxembourg and, to a lesser extent, Guernsey, we are not in direct competition for this type of business. While the offshore domiciles do target similar companies, they tend to be those with risks spread across the globe. As is normally the case in an industry that has not yet reached its full potential, there will always be new and developing competitors but, for the time being at least, there does not seem to be any real threat to the success already achieved by the BVI captive industry.
Current market conditions make these very exciting times for the captive industry and the BVI Association of Insurance Managers is proud to be a part of the Territory’s continued growth.
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