Willis Global Captive Practice
Although it has taken more than 50 years for the captive industry to gain its footing in western countries, Paul Owens of Willis claims that a similar level of growth could be seen in Asia over the course of the next 10...
What is the state of captive insurance in Asia? Who is at the head of the pack, if there is one?
I think it is safe to say the Asian market lags behind some of the more developed western domiciles in terms of acceptance and penetration of captives within corporates. Asia is a sleeping giant, but one that is very suddenly awakening. Traditionally, Singapore has been the choice for Australasian companies seeking a captive solution, but there has been little growth in recent years.
New entrant domiciles like the Cook Islands have opened their doors for business but are still not hosting very many captives. Domiciles such as Labuan do have a few large entities but limited local captive management expertise. New Zealand also has a small amount of captive activity, though the domicile has become less and less attractive over the years as a result of regulatory and fiscal change.
All told, these established domiciles are not significantly expanding—particularly when compared to a similarly sized European domicile, Malta being a prime example. The real expansion is going to come in areas where there is an abundance of corporates, but risk management is still relatively new, such as Micronesia, Taiwan or South Korea.
The elephant in the room that everyone is looking to, of course, is China. Interestingly, 20 percent of all the Fortune 500 companies are Chinese, but there are less than a handful of captives, whereas the other 80 percent of the Fortune 500 have over 80 percent penetration. This is surely bound to change.
The speed at which China has embraced insurance has been stellar, from an economy where insurance was not necessary to a place that is in search of the ‘gold standard’.
This is as a result of the rapid move towards a free-market economy. Additionally, having to compete and partner with European and other western companies has driven Chinese state-owned enterprises to seek higher levels of risk management. We all know that China is the ‘factory of the world’ driving the global economy.
This manufacturing-based economy is beginning to plateau, the impact being felt around the world. Part of the country’s economic plan is the creation of a vibrant insurance sector, and the regulator, whose responsibility it is to implement this plan, has identified captives as a major aspect. This is why they are encouraging it.
Is there an overarching trend in what the split of captive business is in Asia?
I wouldn’t say there is an overarching trend. It really does depend on location and industry segment. The energy sector is particularly hot, as energy captives are quite mature in the West—large oil companies, for example, use them to great effect. On the other hand, airlines use captives to access cheap capacity through the reinsurance markets, but that is just part of a placement rather than being a component in a risk retention strategy.
Can comparisons be drawn between any of the Asian domiciles and some of the more established or familiar domiciles in the West (in terms of vehicles, regulation style, infrastructure, and so on)?
To be honest, they all model themselves on the established markets. I think this is a global trend, particularly with Europe on the final lap of Solvency II implementation. We are beginning to see that many domiciles, such as Singapore and Hong Kong, are going down the route of risk-based capital. I would suggest that a great deal of that will be based around Solvency II, which is being held out to be the gold standard.
The Chinese authorities have recently introduced the China Risk Oriented Solvency System, or C-ROSS, which is based on Solvency II. Regulators are constantly discussing these issues between themselves, and the globalisation of frameworks and regulation is happening all the time.
A couple of weeks ago I had a meeting with an Asian regulator and they were quite open that they were copying a lot of the material that is already out there. You also see cooperation the other way as many western regulators are keen to advise their Asian counterparts.
Is tax an incentive in any (or all) of the active Asian domiciles for prospective captive owners/managers? What other incentives are there to sway them?
Tax is an interesting one, as it is not a driver behind the advice we give our clients. The purpose of a captive is as a key element to a particular corporate’s risk management and risk retention strategy, rather than a tax vehicle—though tax can deliver an economic advantage. There is a lot of discussion around tax and occasionally a domicile will pop their head above the parapet and do something about it. Last year, Hong Kong slashed its tax rate by 50 percent in a bid to become more attractive, much to the annoyance of mainland China and a number of the Australasian domiciles. So, although it is not part of a risk retention strategy, it quite often is part of the economics of what is going on.
What is becoming increasingly important to companies is capital efficiency and cash flow. We are finding that insurance companies want to establish certain vehicles in order to create these capital efficiencies.
How much has to be done before Asia’s captive domiciles can compete with Europe, the US and the Caribbean?
Looking from the inside, you could argue that there is a lack of confidence in the Asian markets due to the absence of a track record. Bermuda and Vermont have the established reputation along with critical mass in terms of numbers and local expertise. Asian corporates however are increasingly powerful and will start to drive alternative options through competition and their own needs.
Many of these large corporations are partnering or hoping to compete with Western firms and in order to do so efficiently they need to manage their risk in a comparable way. Of course, the use of a captive helps deliver some of these efficiencies.
One of the challenges we have in Asia is a lack of experience, as there is no real captive industry to tap into. It is real virgin territory, but it will attract an amount of talent who want to be there at the birth of a new sector of our industry. Our role is changing from an advisory capacity to a more hands-on approach as these companies are beginning to realise that they cannot do this alone.
If it has taken 50-plus years to get western captives to the place that they are now, I think that the timeframe in Asia will be between five and 10. It will be that quick, because of the economic strength, the need to become capital efficient and competition with western companies.
Under C-ROSS, there is a large hit to capital requirements if offshore reinsurance is used. Already they are making it attractive to write reinsurance in mainland China. I would go so far as to say that, in 10 years, China will be one of the premier insurance and reinsurance centres in the world.
