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An
international
perspective
The British Virgin Islands have rapidly risen
to rank among the world’s leading captive
domiciles. Simon Owen, chairman of the
BVI Association of Insurance Managers,
provides an industry update and explains
BVI’s success.
April 2007
Last year was another reminder to us
all that the only unwavering feature of
the insurance and reinsurance industry is
change. The events of the past 12 months
have, yet again, highlighted the fact that
even a remarkably quiet hurricane season
does not decelerate the volatility of the
commercial markets.
We have seen a wave of new capital as a result of the sidecar
revolution, only for it to be almost immediately encumbered by the
decision of a number of US States to follow Florida’s lead and turn
away from traditional catastrophe reinsurance. Climate change
continues to be a major concern for insurers and scientists alike,
and as sea levels continue to rise, so does the frequency of related
perils such as flood and windstorm. In fact, early estimates suggest
that the cost of European windstorm Kyrill could be as high as $10
billion. The outcome of a number of proposed IPOs by recently
formed reinsurers will therefore give us a clear indication of how
potential investors truly perceive the volatile insurance market.
These events, although seemingly unrelated to other classes of
business, such as medical malpractice and D&O, remain inextricably
linked to the rates and available capacity across all lines. Even next
year’s Presidential election may have a detrimental effect on the
insurance industry if, after a decade of political longevity, we see
a significant shift in power and, as a result, insurance companies
have to re-educate a newly elected Congress about important and
pressing issues such as tort reform and the Terrorism Risk Insurance
Act, among others.
Change, or the instability that change can create, particularly
when coupled with the cyclical nature of the commercial markets,
continues to be one of the driving forces behind the ever-growing
need for risk managers to explore alternative risk solutions such as
captive ownership.
Despite claims to the contrary by a number of captive industry
commentators, the captive industry continues to evolve and grow
across the world. Statistics show that only two-thirds of the Global 500
companies use one or more captives so, on that basis alone, there
is certainly considerable room for further growth. Emerging markets
such as India and the Far East still remain relatively untapped and, in
the US, the benefits associated with the formation of 831(b) captives
consistently attract further small to medium-sized companies into
the captive arena.
Industry figures also show that the number of physician and
healthcare-related risk retention groups (RRGs) formed in the relatively
soft market of 2006 actually mirrored those of the significantly harder
markets of 2003 and 2004, adding further testament to the stability
and level of control that captives and RRGs offer their participants.
The number of captive domiciles also increases year upon year,
particularly in the US, where the majority of States have now enacted
captive legislation. In Europe, Guernsey saw a slight reduction in the number of active captives, whereas Malta finally appears to
be beginning to live up to its early promise and has attracted nonhomogeneous
group captives requiring an EU licence.
Although it may be true to say that some domiciles have failed
to capitalise on the opportunities that exist, effectively due to
cumbersome legislation and a lack of quality service providers, the
offshore industry continues to flourish. The British Virgin Islands
(BVI) has been particularly successful in this regard and can now
proudly boast 12 uninterrupted years of growth since the introduction
of the BVI Insurance Act in 1994. At the end of 2006, we reached
yet another significant milestone, with a total of 400 active captives
licensed in the domicile.
There are a number of reasons why captives are formed offshore
rather than onshore. The primary advantage relates to legislation as,
generally, the requirements relating to both margin of solvency and
initial capital requirements are far less onerous than those of our
onshore counterparts.
For example, the initial capital requirements for a single-parent
captive that has little or no third-party exposure can be as low as
$100,000 in the BVI, whereas they can be as much as 10 times
that amount in certain US States. It is obviously important for the
regulators and insurance managers in each jurisdiction to ensure
that the level of capitalisation is suitable, relative to the net written
premium and exposure levels attributed to the captive.
However, in the case of small to medium-sized captives, the
sagacious requirements of offshore domiciles such as the BVI can
have a significant impact on a risk manager’s feasibility assessment.
Cost-efficient operating expenses, and the absence of direct
corporate taxes and premium taxes, give us an immediate and
distinct advantage over our competitors.
Despite the occasional fallacious claim of inadequate or
inappropriate regulation, by individuals who have had no real
exposure to or understanding of offshore domiciles, a large number
of key market figures and true industry experts continue to endorse
the offshore alternative. This was demonstrated at the recent Captive
Insurance Companies Association conference, where one of the
keynote speakers, a former president of the Property Casualty
Insurers Association of America and South Carolina Insurance
Commissioner, advocated the virtues of forming captives offshore.
A legislative framework that is comparable to those of our longerestablished
competitors enables us to offer our clients a wide range
of products and structures. The close working relationship between
the private sector and the regulators also puts us in an enviable
position.
We are unburdened by the restrictive requirements of other
jurisdictions. For example, in the BVI, we do not insist upon the
appointment of local directors; annual general meetings do not
need to be held in the BVI; and it is not obligatory for the captive to
establish bank accounts here. Despite the growing use of segregated cell captives in the BVI, they are not used as commonly in other
jurisdictions. This is primarily due to the fact that our extremely low
annual insurance licence fees can allow captive owners to effectively
form a stand-alone BVI captive for less than the cost of utilising a cell
in other jurisdictions.
From a regulatory standpoint, the BVI is extremely well regarded
by a number of international bodies. In fact, the BVI has never been
blacklisted by any organisation or regulatory body. In 2002, the
Organisation for Economic Co-operation and Development (OECD)
issued a request that required a number of finance centres to commit
to transparency and exchange of information. Whilst a number of
finance centres did not respond and were therefore labelled as “uncooperative”,
the BVI complied with all of the OECD’s requests. Our
regulators are also active members of the Caribbean Financial Action
Task Force (FATF) and played a prominent role in the working group
that revised the FATF’s anti-money laundering recommendations. In
summary, the regulatory regime in the BVI offers an excellent balance
of protection to policyholders and flexibility to captive owners.
It is important to remember that the BVI is not just a captive
domicile—it is a financial services domicile. Not content with being
one of the world’s largest captive jurisdictions, the British Virgin
Islands is home to more than 4,000 funds. It is the leading domicile
for company incorporations, with around 750,000 companies
registered here.
Not only will our recently revised Business Companies Act ensure
that the BVI maintains its status in this regard, but the enhancements
therein also include a number of other exciting features that
provide us with the ability to create structures that combine both
the insurance and capital markets. Sophisticated structures such
as catastrophe bonds and credit derivatives are increasingly being
used to offer insurance-linked solutions to large and complex risks,
so the BVI’s success in both the fund and captive industries bodes
extremely well for the future.
It is important to recognise that the global insurance industry
will find the involvement of the capital markets imperative going
forward. The capital markets seek the diversity that the insurance
market offers and, in turn, the insurance market seeks the additional
capacity that the capital markets provide. When considering that the
nominal value of unexpired swaps and derivative contracts alone
is reportedly in the region of $240 trillion, nearly seven times the
combined GDP of the US, the EU and Japan, it is easy to see why
the BVI is positioning itself to offer assistance in this newly founded
collaboration.
There is often a misconception that the captive industry is an
alternative to the commercial insurance market. In reality, it is
extremely rare for a captive to underwrite all of the risks of its parent.
The co-existence of both industries continues to be of paramount
importance, and it is increasingly becoming just as difficult to imagine
the commercial markets existing without captives as it is to imagine
captives existing without the commercial markets. The captive
industry relieves some of the capacity constraints and vagaries
associated with the commercial markets, whereas the augmented
level of risk management that the use of captives has created is
invaluable to insurers and reinsurers alike.
It is therefore extremely important, when selecting a captive
domicile, that you ensure that the insurance managers licensed
there have the relevant knowledge and suitable level of expertise
to ensure that the captive is properly structured and is not treated
purely as an accounting transaction. Here in the BVI, we have a wide
choice of service providers, many of which have a significant amount
of experience in dealing with commercial insurers and reinsurers,
so our clients can rest assured that they will be afforded an allencompassing
service that is second to none.
In summary, the BVI is mature enough as a domicile to have
attained credibility with the regulatory bodies around the world, yet it
is young enough to embrace new ideas and solutions. The member
companies of the BVI Association of Insurance Managers are very
proud to be associated with the continued success of the domicile
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