Willis
With flexible regulators, robust regulations, local expertise and a strong reputation, the infrastructure needed to support captive growth in Asia is at hand, says Tracy Stopford of Willis in Hong Kong
How is Asia’s captive insurance industry expanding?
The emerging captive industry in Asia is expanding due to a variety of factors—it is as if the stars are aligning. The insurance market in China is growing in size and sophistication at a very fast pace, and riding the coat tails of the traditional insurance industry, captive growth will follow. Additionally, brokers such as Willis and reinsurers see the benefits of adopting the utilisation of captives and can appreciate the value added for their clients and by doing so, they set themselves apart from the competition as they can promote such comprehensive offerings to potential clients. As we already know, the Chinese Insurance Regulatory Committee (CIRC) has announced that it would like China to be an international domicile of choice for captives, which is a bold statement and should open the doors for not only onshore Chinese companies that are looking towards the captive option, but also multinationals with concentrated risk in Asia that may find China an appealing domicile for their captive.
Another factor contributing to growth is the overall trend of not only the large China state-owned enterprises (SOEs) but also the small- and medium-sized enterprises (SMEs) starting to develop their risk management and retention strategies and hence looking to a captive solution. Lastly, we are seeing interest in Asian-owned captives domiciled in the more traditional offshore jurisdictions asking if it makes sense to re-domicile to Asia, given the fact that there are flexible regulators, robust regulations and local expertise readily available.
Is there anything that Asia offers that other domiciles may lack?
Absolutely. A measurable difference is the fact the Hong Kong and Singapore serve as Asia’s two main international financial centres (IFC). The International Monetary Fund (IMF) defines IFCs as “large international full-service centres with advanced settlement and payments systems, supporting large domestic economies, with deep and liquid markets where both the sources and uses of funds are diverse, and where legal and regulatory frameworks are adequate to safeguard the integrity of principal-agent relationships and supervisory functions”. With this said, Hong Kong and Singapore are rated with the third and fourth strongest reputations, respectively, as IFCs, according to the Global Financial Centres Ratings, GFCI17, of March 2015. With the expert financial infrastructure to support and sustain captive growth, Asia has quite an advantage.
What is holding Asia back in terms of growth?
In China, most large organisations are SOEs, which can cause friction between the various parties, but strategically, all are striving towards the same objectives. In the short term, the state-owned insurance companies may be at odds with the large state-owned industrial conglomerates, but all parties will soon realise the mutual and national benefits and a captive will not just be seen as ‘stealing’ market premium.
The decision to create a captive should not be taken lightly. Insurance is unlikely to be the core business of the company making the decision, so a whole new vocabulary, set of procedures and systems will be required. Education and a willingness to work closely with regulators will likely be necessary. However, we see the organisations at the forefront of captive development treading cautiously.
Is education the key strategy to stimulate growth in Asia? If not, what is?
No matter the industry or perceived extent of knowledge in a market, education always plays a vital role. In China, where alternative risk concepts, including captive insurance, are gaining ground, it is imperative that the industry and regulators be front and centre with the availability of resources and support.
How are current market conditions holding captive formations back?
With rates soft in the commercial insurance market, the logical assumption is that an Asian corporation wouldn’t need to form a captive insurer. But as we know, captive utilisation is not all about price. As Asian corporations become more aware of risk management and risk financing techniques, and aim to seek better control of data for decision-making, captives become an obvious solution. This is not to mention the necessity to have in place vigorous governance and structure around their risk programmes in preparation for the implementation of solvency regulations, which alone can be a very strong contributing factor to form a captive.
What makes Asia an appealing destination for captives to domicile in?
A key factor that may be appealing to domiciling in Asia is the availability of China’s Free Trade Zones (FTZ). The Shanghai FTZ was inaugurated in September 2013 with the purpose of increasing China’s competitiveness in the global economy and to encourage international business. The CIRC has supported the development of the FTZ by encouraging the development of innovative insurance products and services, as well as helping Shanghai to develop an insurance sector expert infrastructure.
Currently, there has been interest shown from SMEs in Shanghai to domicile their captives in the FTZ. In fact, since the Shanghai FTZ was formed, at least 12 more FTZs were approved in 2014, opening the door to millions of SMEs to investigate potential captives ‘locally’.
What is the current situation of Asia’s regulatory environment? And is China still focused on implementing its own Solvency II regulation by January 2016?
All regulators are actively promoting captive insurance companies. We see a degree of cooperation between them. In order to attract business they recognise the need to develop and implement ‘Gold Standard’ regulatory frameworks and have been driving towards the implementation of risk-based capital across the insurance company sector, including captive insurers. China has decided to implement China Risk Oriented Solvency System (C-ROSS) beginning 1 January 2016, which has its origins in Solvency II.
The speed of implementation demonstrates the importance of the local regulator to this subject in the pursuit of developing a resilient insurance sector. Recently, the Hong Kong Legislative Council passed the Insurance Companies (Amendment) Bill, which paves the way for the establishment of an Independent Insurance Authority (IIA) to replace the existing office of the Commissioner
