While economic and financial difficulties in Europe and the US persist, Asia remains economically strong. Over the last decade, companies in Asia have grown and become regionally and globally more present, making them suitable captive candidates.
While economic and financial difficulties in Europe and the US persist, Asia remains economically strong. Over the last decade, companies in Asia have grown and become regionally and globally more present, making them suitable captive candidates. Yet, even in Asia’s largest captive domicile, Singapore, most captives originate from Australia and not Asia. The take up rate of large corporate enterprises remains significantly lower compared to Europe and the US.
This is partly due to very soft insurance markets and regulatory constraints in this region, but also because captive service providers have not accommodated all needs of Asian corporates.
Cultural and economic differences
Corporates in many Asian countries operate in an environment, where labour cost is significantly lower than in Europe or the US. Providing a captive solution where the costs are driven by salaries in offshore islands such as Bermuda or Guernsey, are not very appealing. For an Asian captive owner, it is difficult to understand why tasks that can be done for less than half the cost in Asia, are priced at the rates currently offered in these domiciles.
In addition, geographical and cultural distance makes the relationship between management and the owner of the captive more difficult. Not many captive managers in Bermuda or Europe have professionals who are able to explain an issue in Chinese if need be. Difference in time zones, a different expectation on response times to queries and service standards create a challenge to traditional captive centres.
Hence, Asian captive owners prefer domiciles in the region, such as Singapore, Labuan or Micronesia. While there are limited captive domicile options in Asia, these three domiciles have emerged as the leading destinations in the region as they are very attractive in terms of capital requirements and solvency regimes, flexibility of investments, as well as reputation and effectiveness of supervision.
Recently, gaps in the regional captive offering have been closed. A good example is the introduction of protected cell company legislation in Labuan, or the evolution of Micronesia as a newly developed and very successful domicile, which predominantly attracts Japanese captive owners.
The introduction of PCC legislation in Labuan and a somewhat similar multiple corporate captive (MCC) legislation in Micronesia has opened the market to medium-size captive owners. Insurance buyers that may have been too small are now able to use these vehicles to optimise their insurance financing strategy.
Local insurance markets
Most insurance markets in in Asia are very competitive and insurance premiums and deductibles remain very low. Recent regulatory changes will lead to some consolidation, however, there is still an oversupply of non-life insurance in many insurance markets across Asia.
Other markets have remained concentrated, with only a few insurers dominating. They are unwilling to provide fronting services for commercially feasible terms, as they prefer to retain attractive risks in the market, keeping their home market more profitable.
Apart from Hong Kong and Singapore, virtually all Asian markets require a local licence in order to write local risks. Therefore, fronting is required in a captive programme. Capital requirements for insurers have increased in many jurisdictions, leading to higher capital charges on fronting and hence raising the cost of fronting arrangements.
Therefore, finding commercially viable terms for fronting has become difficult in some markets, where the competition make premium rates in other markets so low, that commercial insurance is often more economical compared to a captive programme.
Sharia-compliant captives
Another issue less present in the Western world is the requirement of some companies to have sharia-compliant insurance programmes. While there are different models of sharia-compliant insurance, all have a requirement to use: (i) a sharia-compliant fronting insurer, or operator; (ii) a sharia-compliant reinsurer; (iii) sharia-compliant investments; and (iv) a sharia board, which ensures that all transactions are sharia-compliant and in line with the internal guidelines of the captive as well as the takaful model chosen.
The takaful insurance market is emerging much faster than the traditional insurance market in Asia and more options for fronting and reinsurance become available compared to previous years. Sharia-compliant insurance provides a risk and profit sharing between the insurance operator and the policyholder. Given that the captive is usually owned by the same group of companies it is insuring, the sharia model does usually not change the economic attractiveness of the captive, as one way or the other the owner of the captive, which is also the owner of the insured, will benefit.
Forms of takaful insurance
It is commonly believed that insurance is not allowed under Islam, as one of the six articles of faith is predicated on the belief that only God knows one’s future. Conventional insurance may include ‘unlawful elements’, such as interest, uncertainty, gambling and could possibly be considered unethical. Similar to mutual insurance, the concept of takaful is based on risk sharing, rather than risk transfer. The different models have different ways of how profits are shared between the insurer, or operator and the policyholder. The common models are wakala, mudharaba, a hybrid between the two, as well as waqf, which is more common in the Middle East.
However, in a typical captive setting, the owner of the captive and the owner of the policyholders are ultimately the same entity. Therefore, the model chosen has hardly any economic impact from a consolidated captive owner’s perspective. However, it will affect the way the captive will be able to accumulate capital.
Sharia-compliant captive domiciles
Labuan has established guidelines for sharia-compliant captives. Yet, no sharia-compliant captive has been established in Asia Pacific. There is, however, the first captive in the pipeline, and we do expect more to come once we have established the first. Apart from the restrictions mentioned above, the economic drivers to establish a captive are similar to traditional captives.
Independent service providers
Finally, the last gap that has been recently closed was the availability of truly independent consultants and captive managers. A good example is Singapore, the leading domicile in Asia. Until recently, all captive management providers used to be owned by an insurance company or insurance broker, with possible conflicts of interest.
A captive manager would hardly challenge the programme structure designed by its own colleagues and even more unlikely recommend changing the structure in a fashion that would reduce the brokerage fee income to his own company. Hence captive managers have become more focused on administration, accounting and regulatory issues.
Moreover, independent brokers were naturally reluctant to introduce the captive concept to their clients, knowing that the captive managers are owned by large brokers, ready to attack their account once the captive is set-up and the entire programme structure is visible to the manager.
Overall, there is an increasing appreciation of the value of independent advice from an experienced captive manager, which may compliment or challenge the views of insurance brokers. There is an increased awareness of possible conflicts of interests if both functions are performed by the same company. Independent firms have the freedom to work in wholehearted partnership with clients to deliver independent, effective risk financing solutions.
