Companies in Latin America are waking up to the benefits of captives as a risk transfer solution. Bermuda stands to benefit from this as the national domicile of choice for these formations, as David Gibbons and Giulianna Molero Solari from PwC in Bermuda explain to Bermuda Captive.
Bermuda’s captives professionals have long understood that Latin America holds great potential for the market. That thesis is now coming true in very practical terms: more companies in Latin America are forming captives and Bermuda is benefiting.
David Gibbons, captive insurance leader at PwC Bermuda, which has a dedicated captive group, says there are three main reasons for the burgeoning opportunities for captives providers and experts in the Latin American market.
Overall the economy of the region is showing positive growth.
“A growing economy has stimulated an increased demand for insurance products and services, thereby exposing many companies to the need for a more sophisticated risk management strategy. More and more, captives are being considered as part of that strategy,” Gibbons says.
“THE BERMUDA REGULATORY FRAMEWORK IS WELL ESTABLISHED AND IS BEING ENHANCED AS PART OF THE COUNTRY’S OBJECTIVE OF ACHIEVING EQUIVALENT STATUS WITH THE EU SOLVENCY II INITIATIVE.” DAVID GIBBONS
The second, and related, opportunity is the fact that risk managers are increasingly interested in exploring fronting solutions to address some of their new and growing multinational exposures.
“A captive can be an integral part of the solution and assist in the creation of a flexible compliant insurance programme that addresses many of the insurance needs of these companies,” he says.
Finally, insurance service providers looking to expand in the region are doing a good job of raising awareness of the potential benefits of retaining risk through captive programmes.
Giulianna Molero Solari, captive manager, and a Peruvian native, specialising in Latin America at PwC, says that much of the growth in the market has come about because there has been a concerted effort to educate risk managers in the region.
“Providers are also facilitating training and education programmes throughout the region to raise awareness of the potential benefits of captive programmes,” she explains.
“Brokers are also a very important part of this picture as they are often the first contact a risk manager will deal with and trust. They may not always automatically suggest the use of a captive but they will field the questions from risk managers who may be learning about the concept through other means or may know peers starting to use captive insurance programmes.”
Big, complex risks
Companies that potentially benefit the most from captives come from a broad range of industries including energy, manufacturing, retail, and mining. But they tend to have certain characteristics in common, Gibbons says.
The first is that they will benefit from positive loss experience by retaining significant elements of risk. A captive solution may usually help them solve a specific problem for which there is no clear alternative risk transfer solution. It may help them resolve a situation where current market conditions or shifting underwriting capacity are limiting availability of risk transfer.
On top of these benefits, a captive solution will also normally improve the efficiencies of multinational programmes/operations, help the company realise potential tax efficiencies, reflect improving loss control efforts that have not yet materialised in historic data, bridge a gap between client retentions and attachment points that are increasing due to poor loss experience or market conditions and help the company achieve flexibility regarding the type of exposure, class of risk, and/or coverage issued.
“For new entrants to the market high frequency and low severity risk tend to be the most predictable and easiest to write at least some layer through the captive,” Gibbons explains. “This includes deductible layers of property and general liability programmes that are currently housed on the balance sheet.
“As a captive’s capital and risk management expertise grows, they tend to move into more specific risk such as surety and directors and officers cover. During the last year we have also seen interest in non-traditional risk, mainly political and cyber risk.”
Molero Solari adds that some countries in the region are ahead of the rest when it comes to embracing the use of captives as a risk transfer solution. She says that some markets, such as Colombia and Mexico, are relatively well advanced in awareness of the captive concept whereas others are at the early stages of development.
“The companies that have established captives tend to be some of the largest in the regions, many of which are operating in multiple countries in Latin America as well as outside. In addition, many state-owned companies, particularly in the energy sector, have owned captives for many years,” she says.
“Another common reason companies form captives in the region is as a front to secure access to the reinsurance markets,” Gibbons adds.
The most popular destination
Bermuda is benefiting from this trend. While it is hard to pinpoint the exact number of captives owned by Latin American companies, there are some 250 entities in Bermuda owned by a company in Latin America. This number includes investment funds and holding companies but Gibbons suggest that a large percentage of these companies are captives.
He also estimates that a healthy proportion of new captive formations in Bermuda are of Latin American origin. Of around 25 formations last year, he estimates that between five and seven have been formed by companies in Latin America. Nearly two-thirds of all Latin America-owned captives in the word are being formed in Bermuda.
Bermuda is attracting so much Latin American business for several reasons. Gibbons stresses the Island’s robust regulatory regime and strong resulting reputation. He notes that its client base includes many FTSE 100/Fortune 500 companies due to its reputation as a successful, credible and transparent offshore financial services centre.
The foundation of this is its credible but progressive regulatory regime. Regulation on Bermuda is conducted under a multi-licence system, whereby every insurer must obtain a class of licence depending upon its size, business plan, and the lines of business it will write.
“The Bermuda regulatory framework is well established and is being enhanced as part of the country’s objective of achieving equivalent status with the EU Solvency II initiative,” Gibbons says.
“The objective of the framework is risk-based which focuses the Bermuda Monetary Authority’s (BMA) Solvency II effort on commercial insurers and higher risk companies and allows for proportionate regulation for captives.”
On March 25, 2016, the BMA’s equivalence under the three measures of Solvency II became effective. The BMA is now recognised as a global group supervisor for targeted insurance groups and reinsurance can be conducted on a cross-border basis without market barriers. For Bermuda insurers this means an efficient rather than a redundant layer of group supervision; and for reinsurers it means cross-border trade without individual jurisdictional restrictions.
Bermuda and Switzerland are the only two countries being assessed for full equivalence at this time. This recognises both the importance of the market internationally and the alignment of Bermuda regulation with leading international standards. It is a stated objective of the regulatory authority and the Bermuda government to maintain Bermuda’s position as an internationally recognised leading regulator and a jurisdiction that meets international standards.
Bermuda also has a long history of political, economic and social stability and a large and vibrant reinsurance market, offering captive owners direct access to deep pools of reinsurance capacity on their doorstep on the Island. On the back of this, it also boasts a wealth of intellectual capital in all aspects of risk management.
“Bermuda has a long history of captive management, depths of experienced and specialised services providers from managers to audit companies and lawyers, as well as a genuine and substantial commercial insurance and reinsurance market,” Gibbons says.
“On top of this, Bermuda’s position is helped by numerous tax treaties it has with countries including Mexico, Argentina and Brazil, as well as a multilateral treaty which additionally includes Chile and Colombia.”
Its commitment to the region has been strongly supported by the authorities in Bermuda, with the signing of a number of tax information exchange agreements (TIEAs). Bermuda has signed 40 bilateral TIEAs and multilateral agreements. In 2016, Bermuda became the 33rd signatory of the Multilateral Competent Authority Agreement for the automatic exchange of country-by-country reports.
The Island’s authorities have invested heavily in recent years in boosting the profile and credibility of Bermuda in Latin America in softer ways. The industry has also increasingly united in recent years through bodies such as the Bermuda Business Development Authority to showcase what it can offer. This body has organised several roadshows to the LatAm region in recent years as well as some webinars, coordinating the industry’s experts to present a united front to the region.
This combination of opportunity and the attributes of Bermuda as the natural domicile of choice for companies in the Latin America region means that the prospects are bright for captives experts in Bermuda. With the background of recent successes and growth, the prospects are much greater again.
“In Latin America, risk management is growing as a tool for companies, but its use varies in application across the region. They find a need to focus on more sophisticated risk management, and this has spurred an interest in captives, non-traditional risk financing and risk management,” Gibbons says.
“The captive market has not developed fully in Latin America yet, partly because of complex and restrictive regulations and limited knowledge of captives. Some countries in Latin America also impose a withholding tax on cross-border premiums.
“I wouldn’t say the captive concept is well understood. Some risk managers and local brokers are hearing about the captive concept for the first time. So there are big differences in the levels of risk management in the region.
“Latin America is still viewed as an underdeveloped market for captive use and a great deal of time and effort is being invested by captive practitioners to continue to educate the various markets of the benefits of captives.”
Molero Solari adds that the real key to growth will be educating risk managers in the region.
“The education element of the set-up process and the commencing of business is an important part of the client relationship,” she says.
The 2016 captive insurance market outlook for Latin America remains very positive. From regulatory reform and demographic shifts to rising competition and globalisation, these megatrends are transforming the region’s captive insurance market. Taking advantage of these upheavals will require a rethinking of strategies, solutions and business models.
David Gibbons is captive insurance leader at PwC Bermuda. He can be contacted at: email@example.com
Giulianna Molero Solari is captives manager specialising in Latin America at PwC Bermuda. She can be contacted at: firstname.lastname@example.org
Bermuda, Captive, Risk management, Latin America, North America, PwC Bernuda, David Gibbons, Giulianna Molero Solari, BMA, Solvency II