MEED GCC Captive Insurance

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<p>THE GCC</p> <p>CAPTIVE INSURANCE GUIDE</p> <p></p> <p>*References the 2008 Forbes Tax Misery &amp; Reform Index</p> <p>WEALTH YESTERDAY TODAY TOMORROWQatar. A place thats changing everyday. With its world class regulation and secure and transparent rule of law, the QFC has helped Qatar to become the regions most dynamic economy, and its perfect access point. Benefit today from the lowest tax in the world,* 100% ownership, repatriation of all profits, and an onshore trading environment. And tomorrow, why not experience one of Qatars oldest treasures?</p> <p>BUSINESS ENERGY</p> <p>ContactsMEED HEAD officE Al-thuraya tower 1, 20th Floor, Office 2004, dubai Media City, PO Box 25960, dubai, UAe tel +971 (0)4 390 0045 Fax +971 (0)4 368 8025 email: EDiToRiAL Production Editor Ken Campbell +971 (0)4 375 5012 ken.campbell@ Senior Sub Editor david george +971 (0)4 433 2807 Sub Editor Ananda Shakespeare +971 (0)4 433 1422 ananda.shakespeare@ Art Editor Martin Staniszewski +971 (0)4 375 7988 martin.staniszewski@ ADvERTiSEMEnT SALES Head of Sales Carole Young +971 (0)4 390 0046 carole.young@ Saudi Arabia Enquiries Zaid Shaban +966 (0)1 479 7692 Europe Enquiries Ryan Stewart +44 (0)20 7728 3861 Sales Support Monica dSouza +971 (0)4 390 0698 Monica.dsouza@ MARkETing &amp; ciRcuLATion Marketing Director Louise Jeffreys +971 (0)4 433 5187 louise.jeffreys@ Circulation Marketing Manager Lucy Keenan +971 (0)4 390 0847 lucy.keenan@ cuSToMER SERvicES Retention and Client Relations Manager Sarah Keefe +971 (0)4 375 7990 customerservice@ MEED inSigHT Head of Insight ed James +971 (0)4 367 1231 edward.james@ Research Director Angus Hindley +44 (0)20 7728 4807 Business Development Director Nicky dawson +971 (0)4 368 1975 MEED SubScRipTion SERvicES tel +44 (0)1858 438 837 Fax +44 (0)1858 461 739 EMAp HEAD officE greater London House, Hampstead Road, London NW1 7eJ, UK tel +44 (0)20 7728 5000 For a full list of reader services, editorial and advertising contacts visit</p> <p>The captive potential</p> <p>C</p> <p>aptive insurance, or self insurance, has been a growing trend around the world since its conception in the 1960s. However, its take-up in the Middle</p> <p>East has so far been modest, with only a handful of firms having established their own captive subsidiaries over the last decade.</p> <p>Despite this, there is growing momentum for the creation of a greater number of captives as the insurance sector in the region becomes more sophisticated and the size and, subsequently, risk requirements of companies increases. In parallel, the three GCC domiciles with captive legislation, Bahrain, the Qatar Financial Centre and the Dubai International Financial Centre, and their associated regulators are evolving to better meet the needs of regional companies looking at captive insurance. The greater presence of captive managers, such as Marsh and Kane, is also having a positive impact. This MEED Insight report, published in association with the Qatar Financial Centre Authority, highlights the captive insurance concept and the many benefits it can bring companies that wish to have a better understanding and control of their risk profiles. Its aim is to provide a comprehensive overview of the captive insurance industry from a regional perspective, which will help inform companies about what is an increasingly popular insurance model.</p> <p>Chapters04 The captive concept 12 The regional captive market 20 The case for captives in the GCC 34 Quantifying the GCCs captive market potential 36 Prognosis 37 Global Star case study 39 Mubadala case study</p> <p>ED JAMES, HEAD OF MEED INSIGHT, REPORT AuTHORCOveR ILLUStRAtION: PLUg. PHOtOgRAPHS: SHUtteRStOCK, dReAMStIMe</p> <p>Printed by Headley Brothers Ltd, UK Registered as a newspaper with the Post Office ISSN 0047-7238 Registered as a newspaper with the Post Office ISSN 0047-7238 Member of the Audit Bureau of Circulation</p> <p></p> <p>QFCA | 3</p> <p>The captive conceptInsurance is one of the worlds oldest industries, with evidence of the first basic risk management techniques dating back more than 2,000 years. From the 14th century when the Genoese created the first separate insurance contract, it is an industry that has become ever more sophisticated, with different types of cover created to meet society and commercial needs such as fire, disability, accident and life insurance. In recent years, the captive insurance solution has grown to become an increasingly important dynamic of the insurance industry.</p> <p>A captive is a legal entity created to insure the risks of its parent firm or group of companiesHistoryIn the 1950s, Frederic Mylett Reiss, a US property insurance engineer, was working for a client who wanted to insure its coal mines. These were described by the client as captive mines because their sole purpose was the production of coke and iron ore feedstock for the manufacturing of steel, the clients main line of business.</p> <p>The problem, as recounted by Reiss nephew, was that the premiums had increased substantially and the client was facing up to the fact that it would have to dramatically cut back on its research and development budget to pay the premium. After some intense negotiation with insurers, Reiss succeeded in obtaining a reduced premium from the UK-based Lloyds, but only on the condition that a third party in the US would provide loss prevention and risk management. Reiss came up with the idea of incorporating a company fully owned by the client whose sole purpose was the insurance of its owner. It is from this idea that the worlds first captive insurance firm, Steel Insurance Company of America, was born. Because the new firm would insure only the coal mines and therefore only the risks of their owner, it was described as a captive insurer. The term then stuck.</p> <p>Historically, captive insurance is still a relatively new concept that has so far had limited take-up in the Middle East, but the basic premise behind it is simple. Essentially, a captive insurance company more commonly shortened to just a captive is a legal entity created to insure the risks of its parent company or group of companies with the aim of reducing the total cost of risk and seeking a greater control over their risk profile. Captives are set up for a variety of reasons ranging from a desire to reduce premiums due to the capturing of underwriting profits and investment income to a lack of tailored risk management options from the conventional insurance market. Today, the industry is a multinational business worth tens of billions of dollars. Altogether, there are more than 5,600 captive insurance firms globally. More than 65 per cent of all Fortune 500 companies have captive subsidiaries, while recent estimates have calculated that the captive insurance market has more than $30bn in annual premiums and more than $130bn in assets globally. Such has been its growth that in most developed markets, having a captive subsidiary has become the norm rather than the exception among the worlds largest companies as the graph on the right illustrates.4 | QFCA</p> <p>Captive usage among international major indices (%)</p> <p>100 80 60 40 20 0</p> <p>100</p> <p>80</p> <p>60</p> <p>40</p> <p>20</p> <p>0</p> <p>w Do</p> <p>Jon</p> <p>es</p> <p>30 FT</p> <p>SE</p> <p>0 10</p> <p>C4 CA</p> <p>0 OM</p> <p>X3</p> <p>0</p> <p>BE</p> <p>L2</p> <p>0</p> <p>X DA</p> <p>30</p> <p>X AS</p> <p>50</p> <p>NI</p> <p>K2</p> <p>25</p> <p>Does use a captive</p> <p>Does not use a captive</p> <p>Source: Marsh</p> <p>The simplest captive structure is when a captive is owned by a single parent company</p> <p>there, captive insurance took off, initially in certain Caribbean countries, then the US and over the past 20 years all across the world.</p> <p>owner. Single parent captives can also insure related or unrelated third-party risk up to a certain limit.</p> <p>types of captiveThere are several different types of captive structures that can be employed. Typically, they can be distinguished in two separate ways: by their ownership structure; and their operating structure.</p> <p>group captivesShould the parent company have a number of different subsidiaries, a captive can be established to insure the risks of the parent and its group businesses. Such a structure is described as a group captive arrangement.</p> <p>ownership structures single parent captivesRealising the potential opportunity for capitalising on his captive insurance concept, Reiss went on to set up the International Risk Management Group in Bermuda in 1963. From Captives can be set up by a number of different entities for a number of different reasons. The basic level is the single parent captive where the captive subsidiary insures the risks of its</p> <p>Association-owned captivesAssociation-owned captives are captives established to cover the risks of members of mutual associations, such as doctors and lawyers associations, where individuals frequently carry the same risks and where it makes sense to pool this risk.</p> <p>Structure of a single parent captiveinsurance premiums Business insurance coverageSource: MEED Insight</p> <p>industry captivesSimilar to association-owned captives are industry captives, where companies in a related sector or industry form a captive to insure risks inherent to the industry in which they work.</p> <p>CAptive</p> <p>operating structuresDepending on the location of the captive and its owner/s requirements, the captive, whatever its ownership, may operate in different manners.</p> <p>Structure of a group captive</p> <p>the direct-writing captivegroup Business 1 Business 2 Business 3 premiums CAptive insurance policies</p> <p>The direct-writing captive will directly write and word the insurance policies of its owner/s. It receives the premiums directly and has to pay its parent directly in the event of a claim. The captive can choose to retain all the risk or cede all or part of it to a commercial reinsurer.</p> <p>the reinsurance captiveIn some instances, local laws and regulations prohibit insurers from underwriting business activity if they are not licensed to provide such services in that country. In these instances, the parent can use a locally licensed third-party insurer to issue the policies. The captive then acts as a reinsurer by acquiring all or part of the risk and premium and can then in turn cede the same to another reinsurer. In other cases, especially where a parent has many subsidiaries in different countries using local insurers, the captive acts as a reinsurer by taking on the third-parties risks, in effect pooling the risk of the subsidiaries. The captive can again choose to retain or cede the risks to another reinsurer.QFCA | 5</p> <p>Source: MEED Insight</p> <p>Structure of a captive with a separate fronting insurer</p> <p>premiums pArent CompAny insurance riskSource: MEED Insight</p> <p>premiums Fronting CompAny insurance risk CAptive</p> <p>the gCC CAptive insurAnCe guideprotected Cell CompanyA Protected Cell Company (PCC) is a single legal entity consisting of a core, with its own core assets, and an undefined number of cells, with their own individual cellular assets. Each cell within the PCC can be employed as a captive, with its shares owned by its parent. To operate, each cell is typically required to be authorised as a class of captive defined by the regulator. Managed by a single board sitting at the core level, a PCC is structured in such a way that each individual cell is legally ring-fenced from another. As such, each cells assets cannot be used to meet any other cells liabilities. The core maintains assets that can be used to meet liabilities that cannot be attributed to one cell alone. Generally overseen by a captive insurance manager, the core is the legal entity of the PCC and has the ability to issue cell shares. One of the principal benefits of a PCC is that it enables smaller companies to utilise a captive solution without having to allocate large amounts of capital that a single parent captive requires. Similarly, companies do not have to go through the process of setting up a new company and appointing a board of directors. For that reason, PCCs offer what is known as a Rent-a-Captive arrangement. A PCC is often referred to as a rent-a-captive, says Peter Hodgins, an insurance specialist at UK law firm Clyde &amp; Co. The management of the core is typically the responsibility of the captive manager. The core has to look after the collective interest of all the cells and it tends not to be appropriate for one of the individual cells to have management control over the core as this can potentially create conflicts of interest. The cells themselves should be independent. You deliberately want to keep them as segregated entities so as to avoid cross-liabilities. To try to interlink cells is a bad idea. The cells relationship with the core manager is dealt with through simple subscription agreement. PCCs are very useful as they lower the entry points for a captive solution. You dont have to be spending as much on premiums to justify utilising a captive structure through a cell in a PCC. Its also worth noting that PCCs are not merely limited to insurance; you can use them as a way of raising pension funds for example. They are entities that offer a fair degree of flexibility. In a market that needs to be educated on6 | QFCA</p> <p>Structure of a protected cell company</p> <p>Cell</p> <p>Cell</p> <p>Cell</p> <p>Core</p> <p>Cell</p> <p>CellSource: MEED Insight</p> <p>Cell</p> <p>Religious insurance: Sharia-compliant captives only invest in products that adhere to sharia rules</p> <p></p> <p>photograph: dreamstime</p> <p>Protected cell companies are very useful as they lower the entry points for a captive solution</p> <p>insurance as a whole, particularly in the captive space, a PCC is a great way to do that.</p> <p>sharia-compliant captivesSharia-compliant captives, commonly also known as takaful captives or self-takafuls, operate in a similar manner to conventional captives. The exception is that the sharia-compliant captive only invests in investment products that are sharia-compliant. They must also employ a sharia advisory board and can only be reinsured by sharia-compliant reinsurers, or retakafuls.</p> <p>Compared with a conventional insurer, a captive firm has lower overhead costsarial data, implement uniform accounting procedures and speed up the claims handling process through improved bureaucratic procedures and the ruling out of the need for third parties. AsAkshayRandeva,directorofstrategicdevelopmentattheQatarFinancialCentre,explains: There is an increasing realisation amongst most corporates with a focus on risk management that conventional risk transfer solutions are not sufficient either from a coverage of risks point of view or from the view of the economics of the risk transfer. Advantage: The most obvious benefit to setting up a captive is the potential of lower insurance premiums Forexample,ifwetakeQatarPetroleums historical loss recor...</p>