Malaysia: Captive-ating Asia: "Be Part Of It Or Miss Out"

In the first of a two-part series (October and December), we speak to captive insurance stalwart, Callum Beaton about the Asian captive insurance industry.

Many large corporations have long used captives as an alternative to self-insurance to manage their insurance risks – more than 75% of Fortune 500 companies in the world own a captive today.

While the concept has been around for centuries, it has only gained its acceptance in the last two to three decades. Notwithstanding that, there is also growing interest for captives from the developing ASEAN economies rising in tandem with economic growth in the recent years.

There are only a few jurisdictions in the Asia Pacific region that offer captive as a type of risk management tool and Labuan International and Business Financial Centre (Labuan IBFC) is one of them. 

In fact, there has been a steady growth for the take-up of captives and protected cell companies in the midshore jurisdiction over the years and this is precipitated by the increasing demand from Asian-based risks owners seeking cost-effective and flexible solutions, especially as their business matures and a cross-border risk profile emerges.

There are currently 41 captives established in Labuan IBFC as of August 2016, mainly from the Asia Pacific region, and as a key reinsurance centre, the jurisdiction is working towards ensuring continuous development in the area of risk management.

Specifically, in 2017 Labuan Financial Services Authority (Labuan FSA) is due to launch a Masterplan for Captives, which aims to further develop the offering of self-insurance vehicles available. In addition, Labuan IBFC along with the Labuan International Insurance Association will be jointly hosting Asia's first Captive Conference in 2017.

An area which is in need of constant enhancement is talent development and as such, Labuan FSA invited Mr Beaton to conduct a three-day workshop entitled, "Modern Insurance and Its Implications in the 21st Century".

It was on the side lines of this workshop that Insight Plus caught up with the industry veteran, and had the opportunity to speak to him about his thoughts and outlook for the future of captives in Asia.

IP: Can you share with us your thoughts on the general outlook and the growth of Captives in Asia?

CB:  Asia is regarded as the big growth area, most certainly dominated by developments from Hong Kong and China. Multiple (financial services and captive) jurisdictions are focusing their attention there and it becomes a simple issue "be part of it or miss  out". If one looks at global premium spend and global take-up of captives, roughly 60% of present day global premium spend  comes from America and Europe; when it comes to captives in excess of 95% of captives are American or European  parented.  Turn those figures around and the potential for growth in the sector is enormous. However, a number of jurisdictions are protectionist in their approach to insurance requiring in-country premium retention and/or use of admitted insurance carriers alone. Global financial services have, variously, been impacted by recession, tax evasion, fraud and the perception that the term  "offshore" is synonymous with poor practices and secrecy. 

The issue for captive is to ensure stakeholders appreciate that the ultimate benefit of a captive is to control insurance costs more effectively, enhancing the profit of the owner through reduced outward costs and, generally, improved risk management within an organisation. That is the message that needs to be appreciated and, bizarrely, a truly efficient captive could lead to great tax revenues through increased overall profitability in an organisation. As with all captive jurisdictions, start with the place where there is greatest affiliation (e.g. Bermuda to North America; Guernsey to the United Kingdom; Labuan to Asia) and develop that business opportunity. With that embedded, move outwards and further afield.

IP: Is it true that the take-up of Captives in Asia is less than Europe and the Americas? And if so, what do you think are the contributing factors to this?

CB: Firstly, insurance penetration in Asia is at a much lesser level than in Europe and the Americas as are values at risk. Lay that template on Western captive management services and, in many cases, the economies desired from a captive are  simply not achievable.  The other consideration is to look at the development pattern of captives. The origin is attributed to  Fred Reiss in the late 1950s but it was not until the early 1980s that significant advancement came and that was principally  in Bermuda, Cayman and Guernsey.  The time lag was twenty years; using the same premise, Labuan's captive sector is  just on twenty years of age and the application of the generic model suggests that now is the time that significant  development could arise.

However, a broad constraint will be the absence of a major insurance market of a scale such as London, New York, Munich,  and Zurich. Tokyo, Southeast Asia, although Singapore, are not to be ignored.  Consequently, I am of the opinion that the  issue, such as it is, is a development issue and as insurance penetration increases so too will the appreciation of captive  benefits and Labuan IBFC is well-positioned with a developed but not large (in terms of absolute captive numbers) captive  management community.

IP: What is your perception of Labuan IBFC as a risk management centre?

CB: In answering this question, one has to be very conscious as to cultural differences between a western observer and local practitioners. I have only met with enthusiastic and professional individuals all of whom were open in their views.  Labuan's apparent difficulty is attracting suitably qualified staff and retaining them, however Labuan is not alone as an offshore centre facing that issue. I have not been present in Labuan as a potential captive owner or to advise a potential captive owner in the territory; I cannot therefore comment on the reception and delivery that would be afforded to such persons but, from the parties I have met, I would expect over the course of a day that insurance managers, underwriting managers, regulatory staff, auditors and lawyers could all be visited affording a holistic view of what the jurisdiction has to offer – perhaps next time I visit, I will seek to do just that?  I however say that on the two occasions in Labuan and a further occasion at its representative office in Kuala Lumpur, I have left with a clear view as to why Labuan is an under-appreciated jurisdiction, yet still well situated to contribute to financial services' growth in Southeast Asia. 

IP: What are your thoughts on the risk management sector specifically in relation to captive and re-insurance businesses in Asia?

CB: This is really very difficult for me to answer.  As with any insurance centre, there are those that impress and those that do not. Broadly speaking, I have encountered a high level of professionalism and a keen desire to learn and benefit from experience and when that is translated to a client facing matters there is no question that the risk management sector is well served.  However, in a number of discussions tax came to the fore repeatedly.  There has to be appreciation that tax should be considered after all other benefits.

Without apology, I believe that key to success is a high level of professionalism and staff who understand the entire risk management process. I am also of the view that growth in the sector from the standpoint of Labuan IBFC will have to be supported by a significant number of independent management companies. While perhaps unpalatable news to some individuals, the corporate goal of major broker-owned managers is to manage the captive; they do not necessarily mind where, so long as they are the manager. Consequently, the presence of the major broker-owned companies is also critical to the growth and development of the risk management sector but it needs to be harnessed and clear economic benefit needs to be seen by those managers as to why they should add another jurisdiction to their management company portfolio.

Watch out for the final part of this interview in our December issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.