As the regulatory environment changes, Bermuda’s captive sector will have to expand its horizons, with Latin America close and potentially ready to tango.
The Bermuda captive industry is in the midst of a sea change, the origins of which are far offshore. As the US hones its regulations and tinkers with the Nonadmitted and Reinsurance Reform Act (NRRA), US companies are shying away from offshore jurisdictions and settling onshore instead. A major offshore captive domicile, Bermuda is seeing its new US business slip away.
Tim Faries, a partner at Appleby Bermuda, recognises the importance of emerging markets as the global winds change. One region in particular has caught Bermuda’s eye: Latin America.
“Obviously the US remains a very important market to Bermuda,” says Faries. “In the context of captives, though, there is so much choice now. It’s not just Vermont—almost every state is promoting itself as a captive domicile. We’re not seeing new captives coming from the US in any great number, so our growth on the captive side is definitely coming from Latin America. As those economies emerge you’re going to see much more opportunity.”
But can Latin America bring in the level of business needed to replace US single parent captives? So far, all indicators point to yes. The region is far from economically mature, but already contains Mexico and Brazil, two of the world’s top 15 economies. Other nations such as Chile, Columbia and Peru are expanding even as the rest of the world is contracting economically and tightening its purse strings accordingly.
With Latin America poised to play a key role in Bermuda’s future as a captive domicile, it’s vital to appeal to the region’s potential captive owners by understanding what attracts Latin American captive ownersto the domicile and selling Bermuda accordingly. According to Faries and José Peña, partner and senior vice president—Latin America at JLT, Bermuda has two key elements on its side: “reputation and transparency”.
According to Faries, there’s a simple reason transparency and a sterling reputation are at the top of a Latin American captive owner’s domicile wish list. “Businesses from the region that have interfaced with us are very concerned about their reputations. Let’s face it—they’re coming from countries that have not necessarily enjoyed the best reputation on a global stage, so it’s even more important that they conduct activities only in jurisdictions with the highest quality reputation.”
A series of tax information exchange agreements (TIEAs) have helped Bermuda’s case, removing the Island from government blacklists and opening doors to the Latin American region. As Faries says: “That’s been our approach, and we’ve concluded a number of TIEAs with Latin American countries.” Faries cites an agreement that was ratified by the Mexican government in January 2012, which helped get Bermuda off a blacklist and opened up the ability for Mexican businesses to remit payments to Bermudian companies without having high withholdings. “Where there are barriers, Bermuda is looking to work through them.”
Peña can cite another strong suit in the eyes of Latin America, where business models are perhaps not as advanced and the captive insurance concept not as well understood or widely utilised as it is in the US. “Bermuda is the third largest reinsurance market in the world,” he says. “This not only means that captive owners can find capacity,but also that the service providers are top-tier. I think that some outsiders don’t realise how important it is to have not only insurance managers but also lawyers, bankers and actuaries to provide support.
“Having top-tier service is one of our strongest offers as a domicile, particularly in our experience at JLT. When companies redomicile here, one of the most significant changes they’ve experienced is the high level of service compared to their prior domiciles. Bermuda is the top service provider in the captive world. When prospective captive owners come to Bermuda they realise that and I think they feel more comfortable having their companies domiciled and managed in Bermuda.”
Faries agrees that the quality of service providers is a major boon for the Island, but there’s a related element that attracts Latin American captive owners to Bermuda rather than other well established domiciles. According to Faries, culture is key. “Many people think that Bermuda is part of the Caribbean. We’re actually not. We’re an English-speaking society. With that said, many of the organisations who service the Latin American market here have gone out and invested in hiring people with language skills.”
“That gives us an advantage in terms of the client feeling more comfortable,” Peña notes. “Our clients know that they can pick up the phone and talk to someone who can speak their language. They very much appreciate that.”
With the reasons for Bermuda’s excellence clear, the question becomes how to continue improving Bermuda’s offering to Latin America captive owners and unlock the region’s potential for growth in the process. According to Faries, the secret lies in doing more of the same, with an emphasis on the bilateral tax agreements that have already done so much to open up business between the Island and the region.
“These agreements help slay some of the myths about Bermuda which have been held by foreign governments and drive their policies or their attitudes,” he insists. “There are some countries that have adopted blacklists or have fiscal paradise rules. The TIEAs help and in some cases they completely obviate those barriers. We need to expand that. It’s a matter of keeping the momentum going.”
Citing the 2012 tax agreement with Mexico and its positive results for both countries involved, Peña says: “A client feels more comfortable going to a domicile that has an agreement with its home country.
“I think Bermuda can, and should continue to, be at the forefront of international relations. Bermuda has to keep being active in bodies such as the Financial Stability Board, the International Monetary Fund and other standard-setting bodies. As mentioned before, Bermuda has two strengths: transparency and reputation. Those provideprospective captive owners with the peace of mind that the domicile is first class.”
"Bermuda is the top service provider in the captive world. When prospective captive owners come to Bermuda they realise that and I think they feel more comfortable."
Bilateral tax agreements are in the hands of the government, but there are steps the private sector can take to help ensure the survival of Bermuda’s captive industry even as interest from US companies lags. By attending conferences in the region and arranging visits for potential clients, the private sector can encourage Latin American companies to domicile their captives in Bermuda, where the business day closely matches their own and where the culture offers similarities that other domiciles do not. But, first and foremost, the private sector would do well to focus on being the best in the world when it comes to providing captive services.
“Attracting Latin American business is the responsibility not only of the government but also us, as service providers,” says Peña. “It’s an important thing for us to keep educating our Latin American audience and provide the best advice possible so that they can make the best decision for their businesses. Hopefully our efforts will translate into more business for Bermuda.”
Whether Bermuda can tap the Latin American market could mean the difference between thriving and surviving in a global economic climate that’s changing faster than ever. “There are other emerging economies,” Faries says. “The Asian region is important and Africa as well, but in Latin America—because of geography and the momentum we already have—the opportunities are more present, more immediate, and more plentiful.
“Looking forward, our firm and our colleagues, including the government, see Latin America and Latin American companies as a significant opportunity for the growth of the captive sector in Bermuda.”
Latin America, regulation, service providers, emerging economies