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Why is the BVI So Popular With Captive Insurance Companies? By David Spyer The BVI has been one of the fastest growing captive locations in the world, and with nearly 300 registered companies is now the fourth largest offshore insurance centre after Bermuda, Guernsey and Cayman. Before listing all the good reasons why the BVI is so popular, it may first of all be useful to understand what is meant by the term ‘captive insurance’. A captive insurance company is an insurance company that has been set up primarily to insure the risks of its parent company. In other words, it is like having your very own insurance company, so that when you pay the insurance premiums, you are paying yourself rather than somebody else. The obvious benefit of this is that if you do not have any losses then you keep the entire premium. Needless to say, if you do have losses you may need more money than you have paid in premium. For this reason captives buy their own wholesale insurance, known as reinsurance, to mitigate the effects of adverse claims experience. From this simple explanation it is clear to see that captives work best with companies that have good control over their claims, i.e. those organisations which have good risk management processes in place. Over a period of time, if the captive does not have to pay many claims, it can build up a fund, which will enable it to retain more risk itself rather than having to seek reinsurance. The more of a good risk it can keep, the more profitable it will be. The first captives of the modern era, which emerged during the 1920s and 1930s in Europe were founded by large oil and petro-chemical companies such as ICI, Unilever and BP. These organisations realised that they were considerably larger than the insurance companies and, besides, they understood their complicated risks far better than the insurers and so were able to charge themselves lower premiums. Since then, the growth in captives has flourished. There are now more than 5,000 companies worldwide, most being based in offshore centres such as Bermuda, Guernsey, Cayman and more recently the BVI. The rate of growth of captive formation has been related to the underwriting cycle in the insurance market. In other words, when the insurance industry is profitable there is a lot of competition for your business, and insurance rates fall. However, when insurers suffer a series of large losses such as those resulting from terrorism (September 11), hurricanes (Andrew, Hugo and Katrina), weather patterns (El Nino) or financial scandals (Enron), they start to lose money and immediately increase insurance premiums. To make matters worse, insurers invest huge amounts of their funds (our premiums) in the stock exchange, and when that falls, so too do the value of the insurance companies. All in all, insurance companies have been suffering recently, and this will explain why your insurance premiums continue to go up – even if you have not had any claims. The insurance cycle is arguably at an all time low, which means that premiums are at an all time high. This environment has encouraged buyers of insurance to consider alternatives. The obvious alternatives are not to have insurance at all and keep your fingers crossed, or only to buy insurance above a certain limit. We all know about our motor excess or deductible where we agree to pay the first $1,000 of every claim and the insurer pays the rest. It is this second alternative which is really the back-bone of most captives, where in addition to paying the insurance company, you would also set a bit of money aside in the captive to build up a fund to pay for the deductible part of the loss. At the end of the day, a captive is really a sophisticated way to build up a fund for a rainy day. Having said that, a properly capitalised, registered and regulated captive insurance company also offers a number of important tax advantages to which the rest of us are not entitled. In the past, the prohibitive cost of establishing and running a proper insurance company made a captive a very expensive alternative, and so it tended to be restricted to large organisations with annual insurance premiums of over $500,000. However, recent changes have made the captive option far more accessible to smaller companies. In September 2002 the BVI Government introduced amendments to the Insurance Act, 1994 to create a regime for Segregated Portfolio Companies (SPCs’). This legislation is particularly attractive to foreign companies which are too small to form their own dedicated captives. The introduction of these SPCs has been a great success in other jurisdictions such as Guernsey, and the BVI can look forward to even more growth in these new types of companies soon. Another important change is that the US Congress now gives very favourable tax treatment to small onshore and offshore property and casualty insurance companies. It is this last point which really explains why the BVI’s insurance sector has grown so dramatically, and why most of the captive owners are small to medium sized US based corporations. So why haven’t the other countries around the world done as well as the BVI? The reason is that the BVI has a number of unique competitive advantages over the other offshore jurisdictions. Some of these are listed below: BVI’s advantages:
Besides the advantages listed above, some of the BVI’s specific insurance advantages are that:
The good news is that as long as the global insurance market suffers, the BVI’s captive insurance sector will continue to thrive. For further details please contact: David Spyer at Harneys
Insurance Copyright© Harney, Westwood & Riegels, 2005.
Reprinted with Permission. |
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