Ronny Vellekoop, Marsh
From the UAE to Saudi Arabia, interest in using captives to write a variety of risks—including property, casualty, and financial and professional lines—is increasing across the Persian Gulf, says Marsh’s Ronny Vellekoop.
Frustrated by growing challenges in the global commercial insurance market—where prices are increasing and available coverage terms are being restricted—companies based in the Middle East are increasingly recognising the potential value of captives. And their interest is coinciding with regulatory efforts aimed at making sure that these companies’ captives stay in the region.
A friendlier regulatory framework
Although individual organisations are moving at varying paces—with some having completed captive feasibility studies and others just beginning such efforts—regulators are doing their part to facilitate captive insurance growth in the region. The United Arab Emirates (UAE), for example, is taking steps that could eventually make it a rival to more established domiciles.
“Major re/insurers and several Lloyd’s syndicates have a significant presence in Dubai, providing meaningful access to reinsurance capacity for Dubai-based captives.”
Since the early to mid-2000s, the Dubai International Financial Centre (DIFC) has been a regional financial hub that has attracted institutions from around the world. In part, that’s due to its status as a special economic zone within the Emirate of Dubai that offers low corporate taxes and a legal system based on English common law.
In April—after consultation with the insurance industry—the Dubai Financial Services Authority (DFSA) enacted new regulations that aim to bring the DFIC more into line with other established captive insurance domiciles, including Bermuda, Guernsey, Grand Cayman, and the Isle of Man. Whereas the previous set of rules was generally written to regulate commercial insurers’ activities, the new, modernised regulatory scheme specifically accounts for captives.
Among other changes, the new rules:
Allow capital requirements to be calculated based on its net written premiums rather than gross premiums. This eliminates what was effectively a penalty on captives that relied heavily on reinsurance and thus had relatively low net premiums totals.
Ease concentration risk requirements for captives. Previously, captives were required to spread their risk across a number of banks; as captives are often unrated, this mean that in practice captives would need to provide collateral—often in the form of letters of credit—to each bank to satisfy fronting insurers.
Exempt most small captives from having to complete annual actuarial studies. This rule was particularly burdensome because captives—particularly, smaller ones—typically retain little risk relative to their asset bases.
Enable intercompany loans. Allowing a captive to lend surplus capital back to its parent company can be a significant benefit, especially at times when maintaining liquidity is crucial.
Attracting captives from near and far
Captives are not entirely new to the Middle East. A number of leading companies—primarily in the energy sector—based in Saudi Arabia, Kuwait, and elsewhere, have owned and operated captives for decades.
These captive insurers were established long before the DIFC and similar free economic zones, such as the Abu Dhabi Global Market and Qatar Financial Centre, were created. That meant Middle Eastern parents were forced to call other regions homes to their captives.
The changing regulatory framework now makes Dubai a potentially smarter solution for companies based in the region. For a company based in Riyadh, for example, Dubai offers not only geographic proximity—two hours by plane compared to nearly a day to get to Bermuda or Grand Cayman—but cultural synergy as well.
Setting up shop in the DIFC can also be advantageous because of its development over the last two decades as a regional reinsurance hub. Major re/insurers and several Lloyd’s syndicates have a significant presence in Dubai, providing meaningful access to reinsurance capacity for Dubai-based captives.
Dubai could also prove attractive as a captive domicile for companies headquartered outside the region, particularly those with oil and gas interests. A number of energy companies based in the US, for example, have sizable workforces in Egypt, the UAE, Saudi Arabia, and other oil-rich countries in the Middle East and North Africa. The Persian Gulf’s strategic location could also prove beneficial to potential cargo and shipping industry captive owners headquartered or with interests in Europe, sub-Saharan Africa, and eastern Asia.
Working with the right advisor
For companies based in the region or elsewhere, setting up a captive in the DIFC could be an attractive proposition and a more efficient way to source risk capital. But launching a captive can include several steps.
The first item on the agenda for companies considering a captive is to conduct a feasibility study. An experienced captive advisor can oversee this process, which includes an actuarial analysis of existing programs, modelling of claims and premiums, and more—all of which can help determine whether a captive is a viable solution for an individual company.
The feasibility study’s output can then serve as the basis for regulatory business plan. Before granting a licence for a captive, regulators in all domiciles—including Dubai—will expect to receive such a plan, which provides information on the parent company, which lines of coverage the captive will write, and premium and claims projections. Regulators will also expect to learn about how the captive will verify regulatory compliance; they’ll want to see compliance manuals and monitoring plans, reserving policies, outlines of anti-money laundering/know your customer efforts, director training plans, and more.
Navigating this process could be complex and time-consuming, which makes it all the more important for captive parents to choose the right advisor.
It’s especially vital to work with an advisor that has experience in launching captives. Working with an advisor that has gone through the process before can help you avoid potential pitfalls and implement best practices followed by other parents.
Choosing an advisor that understands the terrain of the Middle East, including familiarity and relationships with regulators, can help to streamline the process and enable you to get the most out of your captive.
Ronny Vellekoop is head of Marsh’s Dubai office. He can be contacted at: email@example.com
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