As interest for captives in the Asia Pacific region grows, the diverse countries that are straddling the captive stratosphere must consider whether to enter the top layer of captive insurance or risk plummeting back to Earth
Interest for captives in the Asia Pacific region continues to rise, but while the area is showing impressive recent growth, it continues to represent a very small share of the global captive market.
Marsh Captive Solutions’ report, ‘The Captive Landscape’, showed that the Asia Pacific region has the most consistent recent growth. From 2016 to 2017, there was a growth of 24 percent in Marsh-managed captives driven by parents in the region—a huge feat when you consider the Caribbean was the only other region with positive growth (6 percent).
Despite this continued growth, the region remains a small player in the global captive market, commanding just 6 percent of captives by parent company region, 4.2 percent by domicile, and producing $547 million in premium by parent company region, with $445 million by domicile.
Anthony Egerton, principal officer of Huntington Underwriting, says these figures are a “slight disappointment”.
He explains: “These figures should be looked at within the context of the region, providing roughly 35 percent of global GDP. If you look at the International Monetary Fund and World Economic Forum projections, the region of the world that is growing the fastest is the Asia Pacific.”
“So, there is a disappointment in the captive industry that things have not advanced as far as they might have.”
Obstacles
Across the region there are a number of factors stunting the growth of the captive market. The first of these is the business conglomerates that dominate many of the emerging economies, such as Indonesia, Malaysia, and Thailand.
Many of these large conglomerates have insurance companies within their ownership which are licensed and regulated onshore and write coverage for both their group and third party business.
Egerton says these insurers are active in the local insurance industries, therefore not fitting under the “Western definition of a captive”.
He adds: “This model in Asia, where there is a wholly owned insurance company that is licensed and regulated onshore that also writes third party business, is part of the answer why the captive industry has not evolved as much as the global GDP figures and the other parameters suggest it should have.”
As is often the case in emerging regions, there is a gap in captive education which negatively impacts the growth of the Asia Pacific captive market.
Egerton explains: “Even in the developed markets like Japan, there is an education gap and a learning curve needed to go through with many organisations.”
There are a number of organisations, such as Guernsey Finance and the Labuan International Business and Financial Centre, that conduct roadshows that provide captive education throughout the region, however, more work is needed to close the education gap.
Egerton comments: “There is still the requirement of education, training, and recognising the role that the captive structure can play in the risk management strategy.”
Another challenge facing captives and their parent companies in the region is the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) initiative.
The initiative brings together more than 115 countries, and jurisdictions, and it is aimed at harmonising tax regulations internationally and counteracting the exploitation of gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.
Vic Pannuzzo, CEO of Artex in Singapore, says the impact of BEPS is being felt by regulators and captive owners globally, and that is no different in the Asia Pacific region.
He remarks: “The need to review governance and substance in the captives’ domicile has developed into an important consideration for captive owners as regulators around the world respond to OECD requirements to counter BEPS or harmful tax practices.”
“We have seen some large captive owners move their insurance and risk office to Singapore to fortify management and governance processes within the domicile.”
Trends
According to Pannuzzo, the Asia Pacific market is similar to most other regions at the moment. He explains: “While there is evidence of new captives being formed in the region, some have also closed as a result of merger and acquisition activity.”
“It is difficult to talk about trends as we really do not have the volume that would allow us to plot particular trends but anecdotally we are seeing opportunities from multinationals that are growing in the region and others that have issues accessing capacity restrictions on natural catastrophe exposures or climate change directives. Captives are being explored as vehicles that can help create capacity by partnering with traditional or alternative risk capital providers.”
ILS
In recent years, there has been a distinct shift toward insurance-linked securities (ILS) in the region. At the start of the year, the Monetary Authority of Singapore (MAS) launched the ILS grant scheme in a bid to catalyse the development of Singapore’s ILS market.
The grant, which will apply to ILS bonds covering all forms of risks, removes all of the issuer’s upfront set up costs which it is hoped will draw ILS business to the country.
Pannuzzo says the region is seeing “increasing momentum” toward ILS deals being done in the near future.
He adds: “Singapore is very keen to become an ILS hub and has formalised an incentive programme that will absorb the set up and issuance costs that can run into the millions.
It has a special purpose reinsurance vehicle framework and is looking to adapt its variable account capital company structure to accommodate protected cell company regulations.”
Singapore’s rise toward becoming a major reinsurance hub was kickstarted with the establishment of the Lloyd’s Asia platform, and Egerton, who worked for Lloyd’s in Asia Pacific between 2003 and 2008, suggests the ILS scheme is a natural step.
Egerton says: “I see the Singaporean authorities efforts in agreeing to sponsor the cost of some early ILS as really the next stage in positioning Singapore as that centre of excellence.”
According to Egerton, Hong Kong continues to remain an important financial centre in the region and within the last month has announced a series of different measures in an attempt to attract global and regional players back.
“They have established a talent list that they wish to attract, they have identified certain sectors of the industry that they want to promote and attract, so there is quite an interesting dynamic between those two historical centres”, he says.
Attention must also be paid to the developments of the “elephant and tiger in the room”, India and China. Special economic zones for financial services, including insurance and reinsurance, have been created in the Chinese Guangdong province, and similar steps have been taken in Gujarat in India.
Egerton notes efforts from Singapore “to promote the city as a centre for ILS issuance as part of that broader industry development.”
Predictions
Asia Pacific may still hold a small slice of the global captive market, but Egerton sees it as a market that is continuing to mature, a view which is supported by the increasing numbers at the Asian Captive Conference and the growth figures.
“I don’t see there being a huge surge of captive formations,” he explains, “but there is definitely a pipeline of prospects that will lead to a steady increase in numbers of captives being formed.”
There is an argument that the captive numbers have been slowed by the very cheap cost of traditional insurance and reinsurance, caused by current over-capitalisation and underpricing, but Egerton is not of this view.
“I’m not sure I buy into that a great deal”, he observes, “I think the other key benefits of a captive still remain irrespective of ultimately the cost of the risk transfer because that is only part of, and at the end of the day a relatively small part of, the motivation for establishing a captive.”
A diverse region
What must not be forgotten in discussing the Asia Pacific market is its diversity. Pannuzzo describes the region as “an eclectic mix of cultures, customs, and regulation”.
He adds: “There is no uniformity of insurance regulations between countries and each market will be approached differently. The biggest markets for captive business continue to be Australia, China/Hong Kong, Japan and Malaysia.”
Egerton too, concludes that the Asia Pacific region is a “complex region”, with major economies like Japan and Australia mixed with smaller but highly healthy cities and countries like Hong Kong and Singapore.
