Why Puerto Rico?

Puerto Rico establishes itself as a captive domicile.

April 2006

The use of captive insurance in risk management and financial scenarios has increased substantially over the last decade.

The concept is not a new one. In the late 1800s, New England textile manufacturers formed a captive as an alternative to rigid fire insurance rates. In the 1970s, captives were used by large national and multinational companies to insure difficult and uncovered risks within a “hard market”. They were also viewed as a tool to help and stabilise premiums.

Following the liability insurance crisis in the early 1980s, the captive insurance market has grown three times as fast as the traditional commercial market. Furthermore, the growth of captives has been fuelled by volatile property and casualty insurance rates and tougher policy terms as a result of the events of September 11, 2001. It is estimated that more than 5,000 captives operate worldwide, generating an estimated $28 billion of written premiums.

There are 37 offshore international captive insurance domiciles and 23 onshore US domiciles; for a total of 60 alternate captive domiciles in the world. This creates a great level of competition between domiciles.

Why consider Puerto Rico?
The insurance market in Puerto Rico presents a unique mix of characteristics that will allow it to create its niche among the top captive domiciles in the world. The local insurance market in Puerto Rico comprises 12 percent of the country’s gross domestic product, an impressive statistic compared to other insurance markets worldwide, which usually average 7.8 percent of their domestic product.

In fact, the insurance market in Puerto Rico has grown at an average of 10 percent a year for the past 10 years; in 2004, premium subscriptions rose to represent a 6.1 percent increase in overall GDP. The health insurance business is a steadfast element of this sustained growth.

Puerto Rico’s insurance market is dominated by domestic insurers, which control approximately 86 percent of property and casualty premiums subscribed in the country. On the other hand, 60 percent of life and health premiums was also subscribed by domestic insurers. For 2004, the volume of premiums subscribed in Puerto Rico was $6.158 billion.

Puerto Rico has 54 domestic insurers, one domestic reinsurer and 3,803 producers authorised to do business in Puerto Rico. Of these, some, like Triple S, have shown a marked presence in other Latin American countries.

Authorised foreign insurers have a strong, solid history of doing business in Puerto Rico. There are 284 foreign entities presently authorised, including Aetna, Jefferson Pilot, John Hancock, CIGNA, Travelers, Federal Insurance, ACE American Insurance, AIG Group, Corporación MAPFRE, GE Group, Mitsui Sumitomo Insurance Company, St. Paul Companies, Trustmark, Liberty Mutual Group, AXA Insurance Group, Metropolitan Group and XL Capital Assurance, among others.

Puerto Rico has easy access to reinsurance markets and a long profitable history with top reinsurers around the world, covering local risks. Forty-six foreign reinsurers such as Swiss Re, Munich Re and Lloyd’s Syndicates, AXA Re, XL Re, and Hanover Re, do business in Puerto Rico. Willis Re, Benfield and Guy Carpenter, among other reinsurance brokers, act as intermediaries for reinsurance transactions.

Marketwise, Puerto Rico insurance business ranks fourth in Latin America; only Argentina, Brazil and Mexico, which have a considerable size advantage, have larger markets.

These facts confirm that Puerto Rico has a solid and stable insurance sector and a highly-regarded business community of insurance and financial professionals.

On September 22, 2004, Puerto Rico enacted the laws and regulations necessary to develop Puerto Rico into an International and Offshore Insurance Centre (CIS). Law #399 and Law #400 are collectively referred to as the International Insurers’ and Reinsurers’ Act of Puerto Rico. These became effective on March 25, 2005 and structure international insurance business to be conducted offshore. As well, they provide exceptions for onshore business, meaning that an international insurer can be authorised to transact surplus lines insurance and/or accept reinsurance on onshore risks.

Law #399 and Law #400 pose Puerto Rico as the ideal gateway into Latin America and US markets for captive and international insurance and reinsurance business. Puerto Rico’s bilingual corporate culture makes it the logical portal to Latin America and the world.

Betsy Barbosa, executive vice president of La Asociación de Compañías de Seguros de Puerto Rico, Inc. (ACODESE) An association representing the interests of local and international insurance companies doing business in Puerto Rico, explains: “Latin America is in great need of insurance coverage in several realms. Through the International & Offshore Insurance Centre of Puerto Rico, we can definitely become the top service provider for the whole region. Companies establishing a domicile in Puerto Rico can take great advantage of our role as bridge and catalyst, both north and south of the American hemisphere.”

The concept is also of particular significance to Hispanic-owned businesses around the world. The US Census Office reports that Hispanics are not only the number one minority group in the United States, but also the premier group in new business development in the nation, with 31 percent average growth between the years 1997 and 2002. This is three times greater than non-Hispanic business growth. The common ground with Puerto Rico’s bilingual corporate culture makes it a domicile of choice for innovative, financial and insurance business.

Puerto Rico’s relationship with the United States is a key element in fostering international and domestic insurance development, as well. Since 1952, Puerto Rico has been a Commonwealth of the United States with its own elected government, and its own tax system and legal structure.

Puerto Rico’s business development policies attest to the stability of its democratic government. The island has spent most of the last 40 years cultivating a steady, manufacturing base attracting a wealth of investors, particularly in the pharmaceuticals and electronics industries.

Under the leadership of Governor Aníbal Acevedo Vilá, Puerto Rico is looking to lock in its position as a knowledge-based service economy, exposing not only Puerto Rican goods, but also its world-class know-how and expertise. In 2005, those employed in banking, accounting and insurance, among other service-oriented industries, represented 26.5 percent of Puerto Rico’s workforce.

In addition to the International and Offshore Insurance Centre, a series of measures has been unveiled to boost Puerto Rico’s competitiveness. These include increased hotel accommodations (5,000 additional hotel rooms to be built over the next three years), tax incentives and a state-of-the-art, $415 million, 20,000-capacity convention centre.

Jorge Silva-Puras, Secretary of Trade and Economic Development of Puerto Rico, has developed a five-year plan, together with the business community and government agencies, to implement benefits from the recent Central America Free Trade Agreement (CAFTA). In his dual role as executive director of the Puerto Rico Industrial Development Co. (PRIDCO), he adds: “Historically, PRIDCO has focused exclusively on manufacturing, but as the economy has developed, services have become more important. We want to provide incentives for services, especially for tourism and international insurance.”

Latin America reflects low insurance penetration and industry efforts through the International and Offshore Insurance Centre of Puerto Rico are expected to be instrumental in insurance development throughout the region.

Puerto Rico exercises considerable latitude in the scope of allowable investments. Its free market economy is subject to both Federal and State regulations and is designed to protect free market competition, specifically but not limited to, the insurance and banking industries. Puerto Rico’s US-dollar based economy, with the general allowance of a free flow of funds abroad and its solid regulatory structure, guarantee sound credit and investment practices.

Puerto Rico is Latin America’s third largest financial centre, behind Mexico and Brazil. The banking and financial sectors are vital to the island’s overall economy. Collectively, Puerto Rico’s financial institutions manage some $201 billion in assets.
Banks are subject to Federal regulation and are members of the Federal Deposit Insurance Corporation. The depth of the finance sector’s product offerings competitively rivals those of Miami in creativity and sophistication. One local bank has been recognised as the highest-performing financial company in the US, in terms of returns to its shareholders over a 10-year period; another is recognised as the largest in Puerto Rico, with more than 200 branches, and the strongest Hispanic presence in banking in the US.

Investment and accounting firms in Puerto Rico have top billing in the world of finance. UBS, Morgan Stanley Dean Witter, Smith Barney, Charles Schwab and Ernst & Young, KPMG and PricewaterhouseCoopers, to name a few, have a strong business presence in the island and are fine examples of the ancillary services available to those interested in doing business through the International and Offshore Insurance Centre of Puerto Rico.

Miguel Ferrer, chief executive officer of UBS Financial Services of Puerto Rico Inc., is a strong supporter of the CIS structure, and is committed to the enhancement of Puerto Rico as an international financial hub. “It is time to change our vision of being insular and introspective—we need an economic model based on export,” he says. “The CIS will have a positive impact on the financial local market, principally because of the increase in the liquidity standards of the local capital market and in the number of participants. An increase in demand for the services provided by investment bankers, brokers, and commercial banks is also expected.”

This vision of Puerto Rico’s financial structure is well supported by a legal system, with both State and Federal district courts having direct appellate recourse to the US Supreme Court and the First Circuit US Court of Appeals. This system not only completes an adequate checks and balances structure for public policy, but also provides a predictable and sound legal culture for business development.

In this sense, Puerto Rico represents the best features of both the onshore and offshore domicile for insurance business.

Puerto Rico is also considered a hub for international travel with daily direct flights to most US, Latin American and European capitals. Among a number of government-sponsored infrastructural developments, a $237 million expansion of the Luis Muñoz Marín International Airport is in progress. Puerto Rico has only a one-hour time difference from New York (two hours following Eastern Daylight Savings Time), so that business communication is fast and convenient. According to Manuel Sánchez Biscombe, executive director of the Puerto Rico Convention Centre, “Puerto Rico is an excellent place to do business. This is a place where you have the US dollar, the US passport, Internet, videoconferencing—and where your Blackberry works!”

The Office of the Commissioner of Insurance of Puerto Rico is the government agency responsible for regulating the traditional insurance industry in Puerto Rico and now, international insurers and captive insurers.

The OCI, as a long-standing member of the National Association of insurance Commissioners (NAIC) and the Association of Latin American Insurance Superintendents (ASSAL) has a long, credible history in insurance regulation.

The Commissioner of Insurance, Dorelisse Juarbe-Jímenez, has been at the forefront of the establishment of the CIS and has allotted specially-trained staff and resources to create a separate structure to oversee this novel concept. “We aim to have a flexible law that allows for the creativity and innovation of the financial sector, while maintaining a regulatory environment that is sound and prudent, yet flexible and reasonable,” she says.

Chief financial analyst Rubén Gely and principal analyst Diana Nassar-Veglio aim to customise the regulatory structure to the needs of the prospective insurers and captive owners. “Puerto Rico has a consultative approach to our International and Offshore Insurance Centre,” says Ms Nassar-Veglio. “We seek to work with captive owners to understand their objectives while aiming to meet our regulatory standards. We want prospective insurers to achieve their risk-financing goals, while ensuring that they remain solvent.” This consultative approach has generated much interest since the recent enactment of the captive legal structure; 18 consultations are in the pipeline at this writing.

The pro-business approach is consonant with the powers delegated to the Office of the Commissioner of Insurance of Puerto Rico, which are geared not only to regulate, but to respond to criteria of excellence and efficiency, which will adequately protect the public interest and meet the challenges and needs of the times. It has also generated an interest from risk management companies that are busily exploring contacts in Puerto Rico. These companies discover that costs are reasonable for the financial services expertise found locally. Travel time and business operating costs are competitive and sometimes lower than other captive offshore jurisdictions. Furthermore, Puerto Rico has reasonable capitalisation requirements and authorisation fees.

Puerto Rico has implemented quick and efficient procedures for organising and activating captive insurers. All information pertinent to the application and authorisation is available electronically and the authorisation process is guaranteed to be completed within 60 days from the submission of a complete application package.
Puerto Rico’s tax treatment of captive insurance companies is one of its most relevant attractions for an offshore jurisdiction: international and captive insurers and their shareholders are exempt from all Puerto Rico taxation. Puerto Rico also grants to shareholders of such insurers an exemption from all State taxation on income from their holdings. A qualified holding company of an international insurer will also be exempt from local taxation, subject to certain limitations. Federal taxation treatment, if applicable, is separate.

Overall, Puerto Rico offers a good niche in the captive international insurance and reinsurance markets to address the needs of markets that are presently underinsured or where insurance penetration is low. The groundwork for creative financial business alternatives is in place.

Puerto Rico offers the best of the onshore in an offshore insurance business environment. As a relative newcomer to the international and captive insurance arena, the question is not “Why Puerto Rico?” but rather “What do I need to do, and when do we begin to do business?”

For further information, visit www.ocs.gobierno.pr.

“There are 37 offshore international captive insurance domiciles and 23 onshore US domiciles; for a total of 60 alternate captive domiciles in the world. This creates a great level of competition between domiciles.”