How has Labuan’s captive market changed since its launch?
Believe it or not, 2020 is our 30th year as a jurisdiction. Labuan International Business and Financial Centre’s (IBFC) recognition as a captive jurisdiction has been relatively recent, although we have been offering captive solutions since the passing of the Offshore Insurance Act 1990.
Historically, Labuan was predominantly a Malaysian-centric IFC and as such the majority of our captives were Malaysian. The first Labuan captive was established in 1998 and is still operational today. We now have over 50 captives. Originally in 2010, 75 percent of the premiums were Malaysian-based, and now the ratio is 65 percent foreign. There has been a tilt between domestic-based captives and foreign captives in Labuan, as the recognition of Labuan IBFC as a regional reinsurance and risk management domicile has taken off. Today we are home to more than 220 insurance-related licensed entities, representing the largest group of licenses in the jurisdiction.
We are home to Asia’s only rated captive, Energas, and to the world’s first Islamic captive in 2014, which is owned by a Sri Lankan entity. Our range of self-insurance vehicles is also wide, ranging from single-parent captives, to association captives, and we are the only jurisdiction in Asia with the protected cell company (PCC), which we have seen a lot of demand for recently.
So essentially, being domiciled in Labuan IBFC means you are part of a much larger ecosystem, providing a comprehensive landscape from which operationalising a captive is possible with ease. Our banking industry with more than 50 banks also assists towards this aim, as do our insurance managers. The other thing to note about Labuan as a captive domicile is the wide range of structures we offer. We also have a single point regulator, Labuan Financial Services Authority, which has a proportional approach to regulation. As a wholesale financial and risk intermediation centre, I think all of this adds to the attractiveness of Labuan IBFC as a jurisdiction.
What trends are you currently seeing in the Labuan captive insurance sector?
With the COVID-19 pandemic, it is has been very hard to predict trends. A lot of people are saying it is a hardening market and we can expect to see a strong take up of captives. Obviously, I would love to agree, however, I think we are looking at very harsh economic climate conditions, which will mean that, while it is an ideal time for us to share the benefits of a self-insurance vehicle the actual set up of such vehicles, it might take longer to fruition. The people that have been very far-sighted in setting up captives before the pandemic are the ones that will fully benefit from having a captive now, especially if there is a healthy cash reserve within the captive which may be drawn from.
I think a lot of companies are looking to set up self-insurance to a certain degree but whether it will be immediate remains to be seen. Setting up an effective captive vehicle might sound easier than it is, and the timeline for board approvals and conducting a viability study will require a fair amount of time. Even though in Labuan IBFC. the regulator has a one-month client charter for licensing approvals, the run up to that point takes a fair amount of time. So it is hard to say what we are going to see going forward in 2020-21. However, I must admit I think in 2021 we will see some growth in the captive numbers, but the current challenges surrounding the pandemic and general uncertainty, coupled with the ever hardening market, is providing an ideal environment from which the acceptability and adoption of captives will grow.
For Labuan IBFC, we are seeing a lot of interest in the protected cell company, we’ve seen three or four come onboard in 2020 alone, of which two are Japanese, targeted at smaller Japanese related entities, as there is the appreciation that captives can provide cheaper access to markets when there are cells involved.
Gross written premiums are increasing in Labuan - how do you see the trend continuing?
When you look at the growth of gross written premiums, I see this upward trend continuing. It is simply a sign of the depth of the reinsurance market being developed in Labuan IBFC, a sign we are proud of.
We are home to 64 reinsurers, 52 captives, 23 managers and 80 brokers, all of which have an accumulated capitalisation of close to USD800 million and enjoy an average profitability ratio of 44 percent. If that doesn’t depict a strong wholesale risk intermediation hub, I am not sure what will.
What are the biggest challenges for the captive market in the region?
When we started executing our market development plans in 2020, we were looking at really pushing for further promotion of captives in Asia and expanding it to Europe due to the changes in prudential landscape there.
The work that we have done thus far has been about generating awareness of self-insurance and engaging with risk managers in Asia. In 2020, our original market development plan was to go deeper to offer even more beyond pure captives, such as PCCs and association captives. We felt that the market was ready to try and understand that a little bit better.
With the challenges we currently face, we have had to bring together risk managers, captive owners, and captive managers in a more sustainable environment. If anyone were to look back at 2020 in 2021, it would not be about growth and expansion, but rather sustainability.
In that sense, what we have tried to do is ensure that regulatory processes in Labuan have some flexibility. They have been extremely helpful and allowing for market players and owners to go to them and explain their situation to then gain the most benefit from the regulatory relief on offer. One of the things that Labuan thrives from is the fact that we have a business-friendly proportional regulator, that is a one-stop regulator you can speak to on a personal, one-on-one level. They have a business-friendly approach which is essential in a wholesale financial services environment.
Having said that, there is a natural check and balance between being business-friendly and being compliant. As part of Malaysia, we are bound by the international standards of the Malaysian Ministry of Finance. This is unique to Labuan and is not found in other jurisdictions. That is one of the reasons we have been very compliant and adhere to these international standards that provide for a natural check and balance system, which keeps Labuan IBFC’s proposition as a mid-shore centre intact.
Looking forward, we are looking at a review of our captive and self-insurance frameworks, which will culminate in certain enhancements to the industry which will be launched by the end of the year. We have appointed an international specialist consultant to assist us and have been engaging with partners to determine how we can better our self-insurance proposition. So watch this space for further developments on the Labuan offering. ■
