When the Bahamas became a destination for capital investment, it was based on the needs of winter residents escaping colder northern climates. Since that time, the depth and expertise of the country’s financial services has created an industry that is no longer just a destination for capital but a place for real and substantive businesses. Indeed, it is a location from which one can invest and manage one’s businesses all around the world.
The captive insurance market is a case in point. A dedicated effort has been made to ensure that the legislative and regulatory environment awaiting new arrivals is proactive and recognises the real business needs of entities. Minimum capital requirements that are competitive with other jurisdictions are in place. While potential licensees are encouraged to work through an insurance manager who is familiar with the Bahamas, this is not mandatory. At the same time the Insurance Commission of the Bahamas (ICB) carries out due diligence on risk managers and directors of the companies interested in coming here to ascertain that policyholders have adequate protection. From the perspective of the Bahamas, its effective regulatory regime is very much a competitive advantage.
Moreover, the captive environment in the Bahamas is supported by a highly experienced and diversified asset and wealth management industry. The jurisdiction has developed a reputation as a leader in these areas, which has enabled it to facilitate synergies with the insurance market.
With nearly 150 active captives as of the end of 2015, more than 15 licensed external insurance intermediaries, direct writing captives, reinsurance captives, risk sharing arrangements and licensed variable insurers, it’s hard to imagine that less than 10 years ago, the Bahamas was a virtual forgotten player in the external insurance marketplace. This, however, is all about to change.
Historically, external insurers licensed in the Bahamas were insuring US-based risks. More specifically, the captive arrangements largely consisted of directly written coverage for a US-based affiliate. Additionally the captive coverages were typically supplemental to the traditional lines of insurance maintained by the business. The complexity of providing coverage that was compliant with the US Department of Labor or specific insurance requirements from banks, vendors, clients and so on fell outside of the realm of concern of many of the captive shareholders. These captives, therefore, provided the respective owners with the primary benefit of pre-funding for the potential loss of events for which there would have been no source of financial recovery in the absence of the captive.
While anyone in the industry would agree that this approach is certainly an advancement to the more commonly pursued approach of ignoring the potential for significant uninsured loss, these owners had still barely scratched the surface of the potential benefits of their captive.
As the learning curve has steepened over the last several years and owners have become more comfortable with the idea of strategic risk retention, the strategies for financing the diverse scope of risks of these insureds has also evolved. Furthermore, the accumulated earnings of these captive arrangements have put the insureds in a powerful bargaining position when it comes time to renew the coverage obtained through third-party insurers.
In combination with a focus on retention analysis and the implementation of risk mitigation strategies at the operating business level, some of these captives have enabled business owners to prudently reduce premiums paid to third-party insurers by as much as 50 percent.
Other success stories include the moment an insured experienced a six-figure covered loss under one of its captive policies and was finally able to quantify the benefit of assuming and distributing risks with numerous unrelated insureds through a risk sharing arrangement. The counterpoint to this realisation was when the assuming reinsurers realised that the impact of such a loss spread among a large of pool of participants was really not as painful as they likely imagined when they entered into such an arrangement. These realisations have built confidence in the planning and have enabled a further evolution into the programme structure of these captives.
Instead of the captive simply insuring the deductible or self-insured retention exposure at the operating business level, authorised fronting insurers are now entering the equation, enabling these captives to assume as much risk as their appetite and captive capacity will allow, before being retroceded to professional reinsurers. Therefore, in some cases these captive programmes are in the process of morphing from a purely direct writing capacity to a more sophisticated hybrid programme structure. The involvement of the authorised fronting insurer not only enables the insured to take over significantly more control of the current commercial insurance programme, but also enables some of these insureds to utilise their captives as profit centres.
There are several programmes currently in the midst of contemplating fronting assistance in the issuance of coverage to vendors, customers, and/or subcontractors of the operating business, or provide extended warranty programmes. Any of these additions will only add integrity to the overall captive structure and enable the owner to position itself to continue to expand the potential for profits via the assumption of risk.
As the risk financing strategies and insurance programmes have evolved, so to have the involvement from regulators and service providers. The ICB has continually added staff to accommodate the new formations and maintains an active interest in understanding the change in business plans and programme structures. It has an active presence at all major industry conferences and staff members that are dedicated to continually increasing their captive knowledge through various insurance credentialing programmes, including the Associate in Captive Insurance through the International Center for Captive Insurance Education.
The ICB today still provides unparalleled accessibility and a strong interest in prudently expanding the external insurance footprint of the Bahamas. In parallel, the insurance expertise that we are seeing in the Bahamas is on the rise, as well as the level of understanding from various audit firms regarding the insurance transactions that are unique to captive arrangements. The level of exposure among local legal professionals has also rapidly expanded. There are reportedly six law firms in New Providence that are actively advising clients on external insurance matters.
It is also important to note that the state of the traditional insurance marketplace worldwide almost necessitates a more rapid availability of these types of solutions to business owners of all sizes. With a glut excess capacity, insurers and reinsurers are more accommodating to alternative planning than they may otherwise be in a harder market. It just so happens that many of the insurers that are accommodating these types of alternative arrangements for US insureds are also pursuing growth in less developed, non-US markets.
The evolution of the external insurance environment in the Bahamas over the previous six or seven years has favourably positioned it to garner the confidence of business owners in Mexico, Colombia, Peru, and Brazil, among numerous other jurisdictions, to pursue a more sophisticated approach to managing risk. Enter players of the calibre of Long Cay Captive Management.
Long Cay is leveraging the existing insurance, banking and finance infrastructure to deliver compliant solutions to two important parties: the owners of growing businesses in developing markets and the insurers that have an interest in providing coverage to these businesses. The growth in interest from international business owners, primarily in the Latin American region, has been fuelled by the economic growth arising from the reduction of trade barriers.
As these small multinational companies grow, there has been an increasing awareness on the importance of risk management. It has also become apparent that the local markets in many of these countries are not capable of handling the sophisticated insurance needs of some of these growing clients and can therefore only offer limited support and limited capacity. In many cases, the penetration of property and casualty insurance to these developing markets is literally only a fraction of what has been experienced in the US. In this sense, one of the initial driving forces is to form a captive solely to gain access to the abundant capacity and creativity in the international reinsurance marketplace. Also relevant is the growing importance of enterprise risk management as a focal point of the rating process that many of these business owners need to go through in order to expand their trade opportunities. The evolving customer needs of these countries are requiring insurers to rethink their strategies and be more nimble than historically anticipated.
In light of the above, however, it’s important to put into perspective the growth opportunity for the Bahamas. In comparison with the approximately 5,000 captive insurance companies that have been formed for US insureds, there have only been approximately 80 captives formed for Latin American business owners. Companies such as Long Cay are confronted with governments whose primary objective has been to provide for the immediate basic needs of its population versus bolstering the availability of insurance for its people. As such, promoting a culture of insurance and communicating the varied benefits of implementing a captive will be challenging due to the limited awareness of these planning opportunities. Furthermore, insurance regulations in many of these countries necessitate the use of fronting insurers, and in many cases, fronting reinsurers, before premiums can be ceded to the captive.
However, with its core areas of expertise and its established network of strategic market partners, Long Cay is poised to lead the next evolution in external insurance in the Bahamas and open the doors to the international insurance and reinsurance opportunities.
Like most productive joint ventures, Long Cay Captive Management was forged out of a mutual acknowledgement of differing but complementary skill sets. Recently named the best private bank in the Bahamas by Global Finance, Deltec Bank & Trust has a long-standing presence in the Bahamas dating back nearly 60 years. Deltec has excelled in the private banking sector, effectively delivering a diverse array of solutions to high net worth clients all over the world, many of whom own and operate closely held private businesses. Over the years, Deltec has strategically established an extensive and well-entrenched network of relationship managers in numerous developed and developing markets.
Hamilton Captive Management is the largest Bahamian insurance intermediary licensed under the External Insurance Act. Hamilton is responsible for a substantial amount of insurance infrastructure including three segregated accounts companies, more than 100 active segregated accounts (also known as cell captives), as well as the risk sharing facility through which the risks and losses of all participants are distributed—the first of its kind in the Bahamas.
Hamilton’s focus, however, has been successfully delivering captive insurance solution to US-based business owners.
Deltec acknowledged the merit of adding sophisticated insurance and risk financing strategies to its already diverse quiver of solutions for international clients. Hamilton recognised the opportunity to scale its current US-focused insurance platform to include business owners worldwide. Both companies recognised the value in being positioned to provide such strategies in the relatively underdeveloped international captive insurance marketplace. On this premise, Long Cay was founded with the objective of delivering alternative risk financing strategies to closely held businesses in non-US jurisdictions.
This innovative partnership is a microcosm for the evolution of the Bahamas as a domicile for external insurance and has played a critical role in positioning the Bahamas to accommodate business from other target-rich areas of the globe.