Nevis: transparency and clarity

Next year will mark the 10th anniversary of Nevis’s original international insurance legislation, the Nevis International Insurance Ordinance of 2004. A decade on, the small Caribbean island continues to post impressive growth within its captive insurance sector.

This success continues despite ever-increasing global competition from the likes of Tennessee, Missouri and Texas, who are among the 30-plus US states with their own captive insurance legislation. Florida, Oregon and Ohio are all anticipated to join that expanding list during the course of 2013, adding still further competition.

But while there are limited signs of green shoots of recovery in the global economy generally, captive insurance business has seen unprecedented growth around the world in the last 12 months, and Nevis continues to play a leading role in that overall expansion as the positive momentum continues.

So how has Nevis managed to continue to show dynamic growth in the face of such fierce competition?

According to Derek Lloyd, director and insurance manager within AMS Group’s captive insurance management division, growth in any business is sustainable only if it is properly resourced and supported. As Lloyd explained: “During the course of the last 12 months, the supervisory body, Nevis Financial Services, has continued to expand and evolve to match the growth of the captive sector. This is imperative to maintaining a consistency of service standards, which in turn is vital to maintaining the long-term support of professional service providers within the jurisdiction.”

Indeed, the number of regulatory staff within the insurance division of Nevis Financial Services has nearly doubled, to correspond with both the increase in the number of licensed captive insurers operating within the jurisdiction and the expanding number of insurance managers now licensed in Nevis.

“The additional personnel within the department allow the appropriate level of regulatory supervision for this industry sector to be maintained, which in turn assists in consolidating the enhanced reputation of Nevis’s captive business on the international stage,” said Lloyd.

According to Kimone Moving, director of the Nevis Investment and Promotion Agency, the additional personnel have a very clear goal. “Adherence to consistency and maintaining our already high standards is paramount,” said Moving.

In addition, a competitive professional and regulatory fee environment has enabled Nevis to expand its captive offerings beyond its traditional US clientele. Nevis has attracted interest from Canada, Latin America, Europe, and more recently the Far East, as an understanding of the multi-faceted benefits of captive ownership spreads throughout the world.

Fierce headwinds

“Contrary to the inaccurate, and often hypocritical, perceptions held in certain quarters that smaller jurisdictions such as Nevis readily lend themselves to tax evasion and money laundering, an academic study conducted in 2012 found that of 180 countries studied, the only country where it was easier than the US to incorporate a business company with little or no due diligence or disclosure of the beneficial owners was Kenya,” said Lloyd.

“Indeed, many of the G8 countries—including the UK—were shown in something of a poor light within the report, despite leading demands for a global level playing field for disclosure and the maintenance of registers on beneficial ownership, and the directors and officers of global corporations, including captive insurance companies,” he added.

“As international pressure mounts from the G8 and other similar bodies for full disclosure of the beneficial owners and directors ofinternational business—whether onshore, offshore or ‘midshore’—the offshore captive industry would do well to highlight the transparency and disclosure that have been a pre-requisite of the initial licensing process of such entities for years.

“Indeed, after licensing, any subsequent changes in the ultimate beneficial owner or officers of a licensed and regulated captive entity can only be completed by submission of a formal application, full due diligence and the prior written approval of the regulator.”

Further uninformed and ill-advised observations were made in spring of 2013 in New York with a general broadside fired against the captive industry as a whole, which was strongly rebutted by the domicile-neutral Captive Insurance Companies Association (CICA), said Lloyd.

The attacks are “symptomatic of the political climate”, he said. In response, smaller jurisdictions are forced to work twice as hard to dispel popular myths about the captive industry, particularly those concerning the supposed veil of secrecy surrounding the ultimate beneficiary and the illegal evasion of taxes by companies with funds flowing through offshore bank accounts.

Lloyd counters that this could not be further from the truth. To submit a captive insurance licence application to Nevis Financial Services for review and approval before any subsequent legal entity can be incorporated, the following due diligence documentation is required from the ultimate beneficial owner of the company and from all directors and officers of a licensed, regulated insurance entity:

• Personal resume;

• Professional reference;

• Bank reference;

• Photo ID (notarised passport or driver’s licence);

• Criminal record/affidavit; and

• Utility bill confirming residential address.

“In addition, AMS and Nevis Financial Services both utilise approved external vetting agencies to further verify the background of any individuals deemed to be ‘control persons’ with respect to the operations and running of any licensed captive entity,” Lloyd explained.

"The offshore captive industry would do well to highlight the transparency and disclosure that have been a pre-requisite of the initial licensing process of such entities for years."

“If the proposed Nevis entity is owned by a corporate structure such as a US limited liability company, trust or foundation, the beneficial owner of that structure still needs to be clearly identified and supported to the satisfaction of the regulator, together with notarised support of the formation documents for that vehicle. Contrast that with the process in a number of US states, where companies can be incorporated with little or no due diligence or statutory requirements for the disclosure of beneficial ownership.”

Turning to the matter of taxation, and specifically for captives of US parents, Lloyd pointed out, “Within the AMS portfolio of clients, all such entities of US parentage are duly registered under the Internal Revenue Code in the US as ‘953(d) companies’. Section 953(d) involves election by a foreign insurance company to be treated as a domestic corporation for US tax purposes.

“Many of those licensed, regulated insurance entities may then make a further election under 28 USC Section 831(b) to be taxed oninvestment income only, so long as the company receives less than $1.2 million in premium each year. The 831(b) election is filed along with the company’s first tax return, and cannot be revoked without the consent of the Secretary of the Treasury.

“This incentive is provided by Congress to encourage the formation of new insurance companies. The 831(b) election does not affect the deductibility of the premiums paid by the operating business to the captive. So long as those premiums are otherwise deductible, they may be deducted by the operating business just like any premium payments,” he said.

Such formal and ratified elections under the US tax code may provide beneficial and legitimate tax deferral situations for the respective companies making such elections, but ultimately any repatriation of underwriting profits to the US is then subject to taxation at appropriate rates. Lloyd noted that the 831(b) election is precisely the same status utilised by the majority of the licensed regulated captives operating within US domiciles.

Lloyd envisages continued growth in captive numbers within Nevis and other similar jurisdictions, particularly those which refuse to be complacent and are willing to confront the obstacles thrown up by larger economic powers. “We can only continue to deal with such issues in a compliant, transparent and professional manner as we have endeavoured to do since the enactment of the original legislation,” he said.

According to Moving, “We’re an efficient jurisdiction with a flexible administration of legislation. Nevis’s consistency in terms of upholding our regulatory standards is a major strength, as is being compliant, transparent and professional in order to maintain consumer confidence.”

Kimone Moving is director of development and marketing at the Nevis Investment Promotion Agency. She can be contacted at: kmoving@ nevisipa.org

Derek Lloyd is director of AMS Insurance (Nevis) Ltd. He can be contacted at: derek.lloyd@amsfinancial.com