Latin America: a region waking up to captives

Historically, engaging with organisations in Latin America and the Caribbean (LAC) on the subject of captive insurance has often been challenging. Efforts were undermined by a lack of understanding of the concept, and a perception that captives were suitable only for big corporations. There was a notion that significant capital is required to create a captive and reservations about the legislative complexity involved in setting up a captive.

A great deal of progress has been made over the past decade. This has partly been the result of the efforts of the broking community and regulators, who have educated clients and introduced regulation that supports the adoption of captives across LAC. A dynamic market has emerged; multinationals and local companies alike are looking to explore alternative financing structures, including captives. This is especially true at a time when the reinsurance market is transitioning, as a captive can help strengthen the overall insurance structure.

However, progress varies across the region. Many companies use their captives to their full advantage, to access the reinsurance market, reduce cost, gain flexibility on coverages, provide alternatives for the lack of local capacity and secure long term strategic financing. However, a significant proportion of firms still do not fully understand how their captive can create value for them.

While there is variation between companies, there are also big differences between countries. Some countries have seen less development around captives, and are overseen by regulators that are still trying to understand where captives fit in within the broader risk management strategy framework.

Different strokes

Where captives are not licensed in the country where the risk is based, they must operate under a double fronting structure if they want to write coverage directly or to act as a reinsurer, to comply with local regulations. Captives are therefore required to have a local carrier, plus a locally registered reinsurance company, which cede the risk to them. That increases the cost of the overall captive structure.

There are regulations and tax reforms in many countries that present economic challenges that complicate the use of captives. Some LAC countries face economic turmoil, with high inflation rates that cause restrictions on retentions, as well as volatile currencies.

Despite the hurdles that exist in the region, Marsh sees many opportunities for new captive formations, as well as more active participation among existing captives. While the growth across the region covers a wide industry spectrum, the majority of those opportunities are in Colombia and Mexico, with Brazil, Chile, Peru, and some countries in Central America also showing promise.

When it comes to domiciles, Bermuda and Barbados are the preferred choices. Both have the regulatory and service infrastructure, and offer geographical convenience. Cayman is also perceived as an attractive option. These are obvious choices, given the tax information exchange agreements (TIEAs) between those domiciles and Latin American countries.

On balance, the future of captives is positive in LAC. As the corporate risk management strategies in the region continue to evolve, captives will naturally play a more important role.

As long as Marsh can demonstrate the value of a captive, there will continue to be companies considering their use. More companies will transition from a conservative position to a more risk retention-based approach. This includes the traditional coverages at one end of the spectrum, all the way to alternative risk structures and employee benefits at the other.

Marsh Captive Solutions expects the growth of captives to continue across the LAC region, as more organisations learn about the tools that are available to them to help them manage today’s increasingly complex business environment.

Maria Escobar is senior vice president at Marsh Captive Solutions. She can be contacted at: maria.c.escobar@marsh.com,

Alejandro Santos is leader at Marsh Risk Analytics and Captive Solutions. He can be contacted at: alejandro.santos@marsh.com