Democratisation of Self-Insurance: Could Asia Lead the Way?
When it comes to risk management, the adage “failing to plan is planning to fail” rings truer than most, but is the luxury of planning limited to entities with deep pockets?
Globally, captives are the most prominent instrument for alternative risk transfer (ART) market and yet, with the world’s GDP amounting to almost USD 90 trillion, should there not be a faster uptake of captives globally and especially so in Asia? After all, Asia is home to more than 50% of the world’s GDP according to the World Bank and 40% of all Fortune 500 companies.
In theory, Asia should have larger number of captives, however numbers do not support this current assumption. Could it be that the harder reinsurance market coupled with greater awareness as well as the understanding of captives will lead to the tipping point for the growth of captives in Asia?
At present, only 6% of parent captives are from Asia. Overall, Asian domiciles have less than 200 captives, with Labuan IBFC being the fastest growing domicile for captives in Asia and MENA, having licensed a quarter of all captives in these regions. Labuan IBFC has progressively shown an upward trend with eight new captive formations in 2020, and six formations in the previous year
In 2020, more than a third of all premiums written in the jurisdiction were from captives, with the industry expecting this percentage to grow in 2021. This expectation is founded on the fact that growth in incorporations remains unabated in 2021, with 8 new captives formed in the first half of 2021 alone. We believe that the growth seen in the jurisdiction is merely the beginning of a coming of age for Asian self-insurance vehicles.
Much has been said about the unrealised potential growth in Asia, pointing at a general lack of awareness amongst the risk management and Board level professionals, to the misconception that captives are somehow a tax dodging vehicle, to the assumption that the only way a captive would be economically beneficial would be if the premiums placed into the captive vehicle runs into tens or hundreds of millions of dollars.
Other potential reasons being bandied include the possibility of large conglomerates that make up most of the businesses in the region already own commercial insurance companies, with mergers and acquisitions between large companies involving captive subsidiaries as well and as such, negate the need for a new captive/self-insurance set-up.
As a jurisdiction in Asia, by Asia, for all, we believe the potential for growth in Asia is much larger and wider. The current ever hardening conditions in certain markets, the unavailability of cover for increasingly esoteric risk profiles, the acceptability of self-insurance vehicles generally and greater awareness as well as appreciation of strategic risk management solutions are all key factors towards this expected growth. Another key element of this virtuous confluence is cell captives.
Enter cell captives
Asians are notoriously known for being cost sensitive, and while the cost benefit of a traditional pure captive structure is undeniable, the time it takes to enjoy these savings for some Asian risk owners can sometimes seem too long. This is where the availability of cell captives comes to the fore, and we believe this will spur the greater appreciation of pure captives as a strategic risk management tool to be considered for a medium-term timeline.
Much has been said about the lack to strategic risk management element in the usage of cells as “band aid” for risk cover, referencing the use of cells as a stop-gap measure for risk that is harder or too expensive to place in the conventional reinsurance market.
And while this might be true, it does not negate the advantages of cells which provide for a fast and cost-efficient solution to such risk profiles. In a well-regulated eco system such as Labuan IBFC that boasts a wide range of self-insurance structures and a strong ecosystem of intermediaries, cells are seen as an efficient (cost-wise and operationally) conduit for medium sized entities to begin their self-insurance journey.
The availability of conversion of a cell into a full-fledged captive is present in mature jurisdictions like Labuan IBFC and is made even more seamless with a regulator like the Labuan Financial Services Authority taking a proportionate business-friendly approach to the intermediation of wholesale financial risk.
Cell captives may or may not act as a replacement to pure captives, but in the current times, it does provide an opportunity for all entities, large and small to reap the benefits of self-insurance as they continue to manage the ever-evolving risk landscape their businesses are facing. And as the understanding and appreciation of self-insurance increases in Asia due to the ready availability of cells, we expect the growth of pure captives to also increase as these businesses will plan ahead for a more holistic strategic risk management.
Universal factors to consider when setting up a captive
The increased interest in captives has also meant an increased in scrutiny. A classic example: captives are now subject to the administrative burden to demonstrate it is a genuine risk management tool based on the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion Profit Shifting (BEPS) guidelines. In a way, this has reduced the misconceived notion mentioned earlier that captives are somehow deemed a “tax play” by companies looking to reduce their fiscal burden.
Other considerations that need to be factored when it comes to captives are also the capital commitment and the risks averse results. The current low interest rate environment and the lack of more efficient capital utilisation means businesses should seriously think through the additional benefits of considering a captive formation. Another crucial consideration is a potential exit strategy of the captive which is often a vital aspect that is overlooked when planning to set up a captive.
Other challenges include differing regulations from one jurisdiction to the other, which although on surface may seem disparate, at the core are similar from one jurisdiction to another. What is key is a full understanding of the ecosystem available in each centre able to support the running and maintenance of a captive vehicle.
Captive as an integrated risk management strategy
Clearly, there are benefits to considering a captive solution towards mitigating corporate risks and if managed efficiently, there can even be additional benefits derived from the management of retained profits within the captive structure.
In addition, the growing importance of risk management further stimulated by regulators and shareholders in relation to corporate governance and the pressure of earnings and capital management from shareholders, all render the need for flexibility that captives offer.
Overall, even during these challenging times, the benefits of captives as a risk management tool still outweigh its perceived challenges.
Globally, captives are the most prominent instrument for alternative risk transfer (ART) market and yet, with the world’s GDP amounting to almost USD 90 trillion, should there not be a faster uptake of captives globally and especially so in Asia? After all, Asia is home to more than 50% of the world’s GDP according to the World Bank and 40% of all Fortune 500 companies.
In theory, Asia should have larger number of captives, however numbers do not support this current assumption. Could it be that the harder reinsurance market coupled with greater awareness as well as the understanding of captives will lead to the tipping point for the growth of captives in Asia?
At present, only 6% of parent captives are from Asia. Overall, Asian domiciles have less than 200 captives, with Labuan IBFC being the fastest growing domicile for captives in Asia and MENA, having licensed a quarter of all captives in these regions. Labuan IBFC has progressively shown an upward trend with eight new captive formations in 2020, and six formations in the previous year
In 2020, more than a third of all premiums written in the jurisdiction were from captives, with the industry expecting this percentage to grow in 2021. This expectation is founded on the fact that growth in incorporations remains unabated in 2021, with 8 new captives formed in the first half of 2021 alone. We believe that the growth seen in the jurisdiction is merely the beginning of a coming of age for Asian self-insurance vehicles.
Much has been said about the unrealised potential growth in Asia, pointing at a general lack of awareness amongst the risk management and Board level professionals, to the misconception that captives are somehow a tax dodging vehicle, to the assumption that the only way a captive would be economically beneficial would be if the premiums placed into the captive vehicle runs into tens or hundreds of millions of dollars.
Other potential reasons being bandied include the possibility of large conglomerates that make up most of the businesses in the region already own commercial insurance companies, with mergers and acquisitions between large companies involving captive subsidiaries as well and as such, negate the need for a new captive/self-insurance set-up.
As a jurisdiction in Asia, by Asia, for all, we believe the potential for growth in Asia is much larger and wider. The current ever hardening conditions in certain markets, the unavailability of cover for increasingly esoteric risk profiles, the acceptability of self-insurance vehicles generally and greater awareness as well as appreciation of strategic risk management solutions are all key factors towards this expected growth. Another key element of this virtuous confluence is cell captives.
Enter cell captives
Asians are notoriously known for being cost sensitive, and while the cost benefit of a traditional pure captive structure is undeniable, the time it takes to enjoy these savings for some Asian risk owners can sometimes seem too long. This is where the availability of cell captives comes to the fore, and we believe this will spur the greater appreciation of pure captives as a strategic risk management tool to be considered for a medium-term timeline.
Much has been said about the lack to strategic risk management element in the usage of cells as “band aid” for risk cover, referencing the use of cells as a stop-gap measure for risk that is harder or too expensive to place in the conventional reinsurance market.
And while this might be true, it does not negate the advantages of cells which provide for a fast and cost-efficient solution to such risk profiles. In a well-regulated eco system such as Labuan IBFC that boasts a wide range of self-insurance structures and a strong ecosystem of intermediaries, cells are seen as an efficient (cost-wise and operationally) conduit for medium sized entities to begin their self-insurance journey.
The availability of conversion of a cell into a full-fledged captive is present in mature jurisdictions like Labuan IBFC and is made even more seamless with a regulator like the Labuan Financial Services Authority taking a proportionate business-friendly approach to the intermediation of wholesale financial risk.
Cell captives may or may not act as a replacement to pure captives, but in the current times, it does provide an opportunity for all entities, large and small to reap the benefits of self-insurance as they continue to manage the ever-evolving risk landscape their businesses are facing. And as the understanding and appreciation of self-insurance increases in Asia due to the ready availability of cells, we expect the growth of pure captives to also increase as these businesses will plan ahead for a more holistic strategic risk management.
Universal factors to consider when setting up a captive
The increased interest in captives has also meant an increased in scrutiny. A classic example: captives are now subject to the administrative burden to demonstrate it is a genuine risk management tool based on the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion Profit Shifting (BEPS) guidelines. In a way, this has reduced the misconceived notion mentioned earlier that captives are somehow deemed a “tax play” by companies looking to reduce their fiscal burden.
Other considerations that need to be factored when it comes to captives are also the capital commitment and the risks averse results. The current low interest rate environment and the lack of more efficient capital utilisation means businesses should seriously think through the additional benefits of considering a captive formation. Another crucial consideration is a potential exit strategy of the captive which is often a vital aspect that is overlooked when planning to set up a captive.
Other challenges include differing regulations from one jurisdiction to the other, which although on surface may seem disparate, at the core are similar from one jurisdiction to another. What is key is a full understanding of the ecosystem available in each centre able to support the running and maintenance of a captive vehicle.
Captive as an integrated risk management strategy
Clearly, there are benefits to considering a captive solution towards mitigating corporate risks and if managed efficiently, there can even be additional benefits derived from the management of retained profits within the captive structure.
In addition, the growing importance of risk management further stimulated by regulators and shareholders in relation to corporate governance and the pressure of earnings and capital management from shareholders, all render the need for flexibility that captives offer.
Overall, even during these challenging times, the benefits of captives as a risk management tool still outweigh its perceived challenges.
Labuan IBFC is pleased to announce that the fourth edition of The Asian Captive Conference (ACC 2021) will be held on 2 December 2021.
Jointly organised with the Labuan International Insurance Association, the conference is dedicated to the development of self-insurance in the Asian region.
Register now to receive your complimentary access to the virtual conference.
