meed gcc captive insurance

www.meedinsight.com

THE GCC

CAPTIVE INSURANCE GUIDE

00 Cover.indd 1 16/11/2011 18:30

*References the 2008 Forbes Tax Misery & Reform Index

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BUSINESS ENERGY

Contacts

04 The captive concept

12 The regional captive market

20 The case for captives in the GCC

34 Quantifying the GCC’s captive market potential

36 Prognosis

37 Global Star case study

39 Mubadala case study

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C 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

East has so far been modest, with only a handful of firms having established their

own captive subsidiaries over the last decade.

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 compa-

nies increases.

In parallel, the three GCC domiciles with captive legislation, Bahrain, the Qatar

Financial Centre and the Dubai International Financial Centre, and their asso-

ciated 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 bene-

fits it can bring companies that wish to have a better understanding and con-

trol of their risk profiles.

Its aim is to provide a comprehensive overview of the captive insurance indus-

try from a regional perspective, which will help inform companies about what

is an increasingly popular insurance model.

ED JAMES, HEAD OF MEED INSIGHT, REPORT AuTHOR

The captive potential

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QFCA | 3

00 Chapter Intro.indd 3 17/11/2011 09:19

www.meedinsight.com4 | QFCA

The captive concept

Insurance is one of the world’s oldest indus-tries, with evidence of the first basic risk man-

agement 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 insur-ance industry.

Historically, captive insurance is still a rela-tively new concept that has so far had limited take-up in the Middle East, but the basic premise behind it is simple. Essentially, a cap-tive insurance company – more commonly shortened to just ‘a captive’ – is a legal entity created to insure the risks of its parent com-pany 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 rang-ing 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 For-tune 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 devel-oped markets, having a captive subsidiary has become the norm rather than the excep-tion among the world’s largest companies as the graph on the right illustrates.

The problem, as recounted by Reiss’ nephew, was that the premiums had increased substan-tially 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 Lloyd’s, 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 world’s first captive insurance firm, Steel Insurance Company of America, was born. Because the new firm would insure only the coal mines and there-fore only the risks of their owner, it was described as a captive insurer. The term then stuck.

Source: Marsh

Captive usage among international major indices

(%)

0

20

40

60

80

100

Dow Jo

nes 3

0

FTSE 1

00

OMX 30

ASX 50

NIK 225

CAC 40

BEL 20

DAX 30

100

80

60

40

20

0

Does use a captive Does not use a captive

HistoryIn the 1950s, Frederic Mylett Reiss, a US prop-erty insurance engineer, was working for a cli-ent 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 manufac-turing of steel, the client’s main line of business.

“A captive is a legal entity created to insure the risks of its parent firm or group of companies”

01 Chapter.indd 4 16/11/2011 18:22

www.meedinsight.com QFCA | 5

Realising the potential opportunity for capital-ising on his captive insurance concept, Reiss went on to set up the International Risk Man-agement Group in Bermuda in 1963. From

Structure of a captive with a separate fronting insurer

Source: MEED Insight

pArent CompAny CAptive

premiums premiums

insurance risk

insurance risk

FrontingCompAny

owner. Single parent captives can also insure related or unrelated third-party risk up to a certain limit.

group captivesShould the parent company have a number of different subsidiaries, a captive can be estab-lished to insure the risks of the parent and its group businesses. Such a structure is described as a group captive arrangement.

Association-owned captivesAssociation-owned captives are captives estab-lished 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.

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.

operating structuresDepending on the location of the captive and its owner/s’ requirements, the captive, whatever its ownership, may operate in differ-ent manners.

the direct-writing captiveThe 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.

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 pre-mium 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 rein-surer 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.

“The simplest captive structure is when a captive is owned by a single parent company”

Structure of a group captive


group

CAptive

premiums

insurance policies

Business 1

Business 2

Business 3

there, captive insurance took off, initially in certain Caribbean countries, then the US and over the past 20 years all across the world.

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.

ownership structuressingle parent captivesCaptives 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

Structure of a single parent captive


Business CAptive

insurance premiums

insurance coverage

01 Chapter.indd 5 16/11/2011 18:22


the gCC CAptive insurAnCe guide

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protected 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 cap-tive, 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 cell’s assets cannot be used to meet any other cell’s 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 insur-ance 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-cap-tive’,” says Peter Hodgins, an insurance specialist at UK law firm Clyde & Co. “The management of the core is typically the respon-sibility 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 cre-ate 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 don’t have to be spend-ing as much on premiums to justify utilising a captive structure through a cell in a PCC.

“It’s 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 flexi-bility. In a market that needs to be educated on

Structure of a protected cell company


Cell

Cell

Cell

Cell

Cell

CellCore

insurance as a whole, particularly in the cap-tive space, a PCC is a great way to do that.”

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-com-pliant captive only invests in investment prod-ucts that are sharia-compliant. They must also employ a sharia advisory board and can only be reinsured by sharia-compliant reinsurers, or retakafuls.

Religious insurance: Sharia-compliant captives only invest in products that adhere to sharia rules

“Protected cell companies are very useful as they lower the entry points for a captive solution”

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Benefits of establishing a captive insurance subsidiaryThe benefits of setting up a captive insurance unit are derived from both a financial and insurance perspective.

Commercial advantages:• Themostobviousbenefittosettingupacap-

tive is the potential of lower premiums. Com-pared with a conventional insurer, the captive has considerably lower overhead costs and any underwriting profit or unclaimed premi-ums can be retained by the parent.

• Havingacaptivealsogivestheparentfirmthe ability to tap into the lower cost interna-tional reinsurance market directly. This ena-bles the captive to determine the amount of risk it wishes to take on and how much it would prefer to be reinsured. When it comes to making claims, the owner avoids the lengthy and often bureaucratic process that it will encounter with third-party insurers.

• Thecaptivecanuseunpaidclaimsforinvestment purposes, the profits from which can then be passed back to the parent.

• Therearecertaintaxadvantagestohavingacaptive as in most domiciles premiums paid

toacaptivearetaxdeductible.However,giventhattheGCCislargelytaxfree,thisisless relevant to captives set up in the region by regional firms, although it may be perti-nent if they operate and own overseas units injurisdictionswhichdoimposetaxation.

• Acaptivecouldpotentiallybeginofferingitsinsurance services to third parties, provided it has the right licence, thereby providing an additional revenue stream.

Insurance advantages:• Acaptivecantailorpoliciesforitsparent’s

exactrequirements.Conversely,theparentdoes not have to pay for elements of policies it does not need, which is often the case with insurance cover from the commercial market.

• Havingacaptiveimprovestheparentcom-pany’snegotiatingpositionwithconven-tional insurers.

• Thelargerthesizeofthecaptive,thegreateritsabilitytotakeonitsparent’srisks,con-verselyreducingtheowner’sdependenceonconventional insurance.

• Captivesenabletheparenttoallocateitscosts among its profit centres, build up actu-

arial data, implement uniform accounting procedures and speed up the claims han-dling process through improved bureau-cratic procedures and the ruling out of the need for third parties.

AsAkshayRandeva,directorofstrategicdevel-opmentattheQatarFinancialCentre,explains:“There is an increasing realisation amongst most corporates with a focus on risk manage-ment that conventional risk transfer solutions are not sufficient either from a coverage of risks point of view or from the view of the econom-ics of the risk transfer.

“Forexample,ifwetakeQatarPetroleum’s historical loss record and compare it with [UK-based]BP’s,itismuchlower.So,forcom-paniesinthatsituation,thequestioniswhyamI paying the same premium?”

ShaunBrookofUS-basedcaptivemanage-ment specialist Kane supports this premise. “What a captive provides is a means of retain-ing risk in a structured environment, which offers multiple financial, risk and claims man-agement benefits based on solid corporate governance principles. The captive is a way to facilitate risk management, creating a cen-tral mechanism for controlling risk within the organisation.

“While there is a growing appetite among leading regional insurers to retain greater amounts of risk and reduce the volume ceded out of the region, the Middle East market is primarily dominated by interna-tionalinsurers.Exposedtovolatileinterna-tional markets and restricted by the limited range of insurance products available to them, many well-run operations in the region are forced to subsidise poorly man-aged organisations in other territories through paying above-average premium con-tributionsrelativetotheirriskexposures.The captive provides companies with an opportunity to create a risk transfer scenario

“Compared with a conventional insurer, a captive firm has lower overhead costs”

Advantage: The most obvious benefit to setting up a captive is the potential of lower insurance premiums

01 Chapter.indd 7 16/11/2011 18:22



“There is always the possibility, no matter how small, of adverse results from the captive”

The captive establishment process


3-6 months

3-6 months

3 months

• initial decision to explore establishment of captive subsidiary• engagement of captive insurance specialist to carry out feasibility study to

assist in making final investment decision• selection of domicile, appropriate levels of retention and captive structure

• incorporation of captive, selection of board, appointment of advisers• registration of captive at selected domicile, payment of application fees

and allocation of base capital

• Finalise business model, complete application process with regulator and register company

• Complete operational set-up

that is more commensurate with their levels of assessed exposure.”

Captives can also carry their potential disad-vantages, which need to be considered prior to opting for the captive insurance route.

• Theparenthastocommitaportionofitscapital to the captive to ensure that the cap-tive can meet its commitments in the event of claims being made. How much capital has to be allocated is dependent on the domicile and type of captive. Companies must consider that this capital may not pro-vide the same return as if they themselves had invested in their own operations, although most regulators allow for a por-tion of their capital to be loaned back to the parent.

• Captivesrequireacertainamountofset-upandoperatingcosts.Theparentwillneedtoinvest in a feasibility study, licence, regula-tory, legal and auditing fees and pay for the management of the captive, normally a third-party insurance manager, such as Marsh.

• Captivesneedmanagementcommitmentfrom the parent.

• Aswithanyinsurer,thereisalwaysthepossi-bility, no matter how small, of adverse results from the captive due to higher-than-expected claims. While captives are designed to mini-mise their parents’ risk, they can never com-pletely eliminate it. Should a captive’s capital decrease as a result, the parent may find itself having to inject additional capital into it, although this risk is reduced by arranging a proper reinsurance programme.

Weighing up the respective merits and disad-vantages of a captive is crucial for any com-pany before commencing any formal process towards establishing one.

establishing a captiveThereareseveralstepsacompanyshouldgothrough before making the final decision to establish a captive.

Perhaps the most important is the feasibility study. Normally carried out by an established captive insurance specialist, such as Marsh, AONorKane,theaimofthefeasibilitystudyisto determine whether a captive would be the right choice for the parent and then to deter-mine what captive structure to employ. Legal, financial and accountancy advice may also be taken at this stage.

Thefeasibilitystudyidentifiestheparent’sstrategicaimsanditstolerancetorisk.Thisisfollowed by the collection, manipulation, and analysisoflossdataandexposures.Oncecom-plete, the study will examine the best captive structure to be employed, the appropriate lev-els of retention for it, the most suitable domi-cile, potential costs for setting up and operat-ing the captive, plus a cost/benefit analysis to assist in the final investment decision.

If the decision is made to go ahead with the captive, then the next phase would be the processofestablishingthenewfirm.Thiswill

01 Chapter.indd 8 16/11/2011 18:22


Parent corporation or association

Captive board

Management company

Auditors Auditors

Investment managers BankersRegulators

Captive operational functions

Source: Marsh

include the selection of the captive’s board members, the appointment of legal, auditing and insurance advisers, preparation of the application papers for the selected domi-cile, the incorporation of the captive and finally the creation of the registered office and compliance to any other legal and regula-tory requirements.

“The starting point is always the feasibility study to determine whether the captive solu-tion is appropriate for your business,” says Hodgins. “There are a number of captive man-agers that can assist the company with this decision, and some large businesses often have sufficient in-house expertise provided by insurance managers/purchasers.

“Generally, I think that if you are spending between $1m and $2m on insurance premi-ums, then the chances are that captive insur-ance can offer you some level of efficiency within your business. That’s not to say that if you do not have that level of premium spending, there are no captive solutions that may work for you typically through PCCs, however.

“The questions to ask are, is it the right thing for me and does it work? I say that would typi-cally be done with the captive manager who would go with you through the details of your business, its risks and insurance needs and who would then put forward a proposal.

“The second consideration would then be about which jurisdiction to set up the captive insurer. Depending on the nature of the entity in question, the analysis of the appro-priate jurisdiction can be a very broad choice. There are obviously a number of countries with very strong captive regimes. What you are looking at from a jurisdictional perspective is the appropriate domicile for the captive. There is no one-size-fits-all answer to that question.

“You will typically be looking at where the centre of the gravity of your business operation is, whether it has operations in the jurisdiction where the captive is to be estab-lished and managed, and other such practi-cal considerations.

“Then there are the tax consequences. If you have to pay claims within jurisdictions that impose taxes, then this will be an issue for con-sideration. While tax can be less of an issue in the Middle East region, you must look at where

the entities operate. Some of these mega-con-glomerates’ operations are not confined to the GCC. That’s why it’s important to analyse the risks they face and the jurisdiction in which they operate.”

Establishing a captive is not necessarily a quick process and companies should be pre-pared to put in a fair degree of effort to ensure the right domicile, advisers, and structures are employed.

“The fastest you can get it done is three months from the point you have made the decision to set up the business,” says Hodgins. “There is a period of time you would need to put the docu-ments together and a process wherein you would be dealing with authorities. Typically that’s the fastest you can go, as the regulator would not give the approval before at least 50 days.

“But it can take far longer than that. The feasibility stage is not necessarily a quick process. It can take months to do depending on the complexity of business you are deal-ing with.

“So for the set-up process, I say three months from when the decision is made at least, but you might realistically be looking at six months. The simple reason for that is informa-tion that needs to be put together. While the advisers can play their bit, the speed of the process depends very much on the client.”

Operating the captiveOverall control of the captive is exercised by its board of directors selected by the parent com-pany or association. The board will appoint a captive manager to run the captive. In turn, the captive manager will appoint other profes-sional service providers such as law firms, accountants and financial advisers.

The insurance management firms carry out the day-to-day operations of the captive, providing the necessary insurance expertise that the cap-tive requires. This is particularly important, given that captives are often formed by parent companies with limited insurance experience. In specialised areas such as captive insurance, having the right captive manager is crucial.

The captive manager will perform a number of important functions, ranging from underwrit-ing policies issued by the captive, claims han-dling and settlement to preparing management reports and ensuring the captive remains com-pliant with the laws and regulations of the domicile in which it is located.

Currently, there are three main insurance man-agers focusing on captives in the region: UAE-based Marsh, Bahrain-based Ensurion and Kane, which is so far the first captive manager to be licensed and authorised by the Qatar Financial Centre Authority. As the captive con-cept gains popularity in the region, more cap-tive managers are expected to establish them-selves in the respective domiciles.

01 Chapter.indd 9 16/11/2011 18:22



Source: Marsh

Business underwritten by captives

Property damage

15

6

12

4%Employers’ liability/

workers’ compensation

Health/Medical

Financial products

Auto liability

Professional indemnity

18

8

4

20

9

4

Values (%)

Product liability

Marine

General/third party liability

Other

Captive utilisation by sector of parent company

10

6

3

10

6

3

%

11

7

3

2

20

8

6

3

Values (%)

Source: Marsh

Financial institutions

Power and utilities

Other

Chemicals

Real estate

Technology and telecoms

Transportation

Construction

Mining, metals and minerals

Life sciences

Aviation and aerospace

Automotive

Healthcare

Manufacturing

Retail and con-sumer products 2

eligibilityOne of the most attractive aspects of captive insurance is that it can apply to any company or industry. Its application is not limited solely to companies. Mutual associations or groups of employees such as pilots, lawyers and doctors could also pool their resources in the forma-tion of a captive.

Generally, the view among captive experts is that any company with annual premiums in excess of $1m is in a position to consider establishing a captive. Firms with premiums lower than that would not necessarily benefit financially from a captive as its operating costs would outweigh the financial advantages that it would bring.

In the GCC, this premium threshold would probably be higher as Ronny Vellekoop, Head of Marsh Management Services (Dubai) Lim-ited, explains: “The main criterion for a com-pany to set up a captive is to have a minimum premium volume so that the captive can meet its operating expenses. As a rule of thumb, for example in Europe, if you have a minimum $1m of premium, you are in a position to think about starting a captive.

“But because the premiums are generally lower in this region, I would say the mini-mum you should start looking at should probably be about $3-5m in premiums for a captive to be able to operate and meet its operating expenses.”

Data from Marsh highlights that every indus-try, without any particular distinction, employs captives. Ultimately, every company requires insurance and this commonality is reflected in the broad utilisation of the captive concept in each sector.

However, this does not mean that captives are suitable for all types of businesses warns Brook. “The [captive] mechanism is ideally suited to those organisations which operate a robust bal-ance sheet,” he says. “The firms should also be profitable, operate from a stable base and have a high level of understanding of their risk expo-sures, resulting in an above-average risk profile.

“Running risk through a captive requires both capital and appetite. However, if a firm employs sophisticated risk-modelling techniques, has conducted a detailed analysis of its overall exposures and is capable of pricing those expo-sures accurately, then the benefits of operating a captive will quickly become apparent.”

Just as broad are the types of risk that captive insurance covers, ranging from auto liability insurance to professional indemnity. This flex-ibility that captives provide has been one of the main driving forces behind the industry’s rapid growth in recent years.

“Captives can be applied to most areas of insurance if the risk is clearly defined,” says Brook. “Such areas may include product and operating liability; terrorism and natural haz-

ards; motor; professional indemnity; employee liability; contractors’ all risks; property liabil-ity; and business interruption liability.

“Captives are also taking on higher limits and looking at new products and lines. For exam-ple, some companies are now looking at chan-nelling their employee benefits through the captive, including group term life insurance and long-term disability. Captive are also increasingly being considered for more eso-

01 Chapter.indd 10 16/11/2011 18:21


15

6

12

4

18

8

4

20

9

4

The main captive domiciles

Bermuda

9

5

3

8

5%Barbados

US-Hawaii

Other (Countries)

Guernsey

Ireland

15

5

5

29

6

5

Values (%)

Source: Marsh

Other (US)

US-South Carolina

Isle of Man

SingaporeCayman Islands

US-Vermont

Luxembourg

3

2

10

6

3

10

6

3

11

7

3

2

20

8

6

3

2

“Publicly listed companies form the majority of captive parents, followed by private firms”

teric risks that are harder to place in the stand-ard market, such as reputational risk.

“With the implementation of mandatory health cover in the region, the potential for captives as a means of providing corporate medical insur-ance is increasing. There are already a signifi-cant number of self-administered schemes in place in the region, but at present they are not structured as captives.”

Vellekoop agrees. “You can take in every risk in a captive,” he says. “This includes property, liability, pollution, fire, medical, accident, marine and aviation. The exception is direc-tors’ and officers’ liability because it provides legal assistance cover for directors being sued either by shareholders or by investors.

“If the corporate shareholder, who also owns the captive, is suing the director for misman-agement or misconduct and the director subse-quently gets his legal expenses covered by the captive, it will be conflict of interest. For that reason, directors’ and officers’ liabilities are not usually covered by captives.”

These views are supported by Marsh data high-lighting that all types of insurance cover are provided by captives, with property damage forming the largest proportion of business underwritten, followed by general and third-party liability.

Similarly, there is no distinction between the types of companies that can employ captives. Publicly listed companies comprise the majority of captive parents globally, followed by private companies of which there are more than 2,000. The latter includes family-owned firms and those owned or controlled by the state.

“The type of company really doesn’t matter,” says Vellekoop. “The only thing the company needs to have is a risk management culture. If they don’t and if they just want to keep things simple by transferring risk to the com-mercial insurance market, then a captive would not be appropriate.”

This is an important fact due to the preponder-ance of family-owned and government- controlled business in the region. Although only a few firms in the region have set up a cap-tive so far, they represent all types of business, ranging from state-controlled firms such as Saudi Aramco and government-owned Dubai Holding, to listed companies such as Tabreed

and even individuals such as Ruan Janse van Rensburg and his Global Star PCC.

“Provided there is sufficient scale in the busi-ness, I think that a captive can work with any type or kind of business/sector,” says Hodgins. “There are very common risks that can be insured by the captive that every business has. Everyone has got property and employees, and every business runs the possibility of incurring a liability with a third party. It’s really more a function of scale than sector or type of firm.”

Vellekoop agrees. “Captives can be in any industry,” he says. “Sometimes you see them in an industry you have never thought of. You see them everywhere.

“Globally, the financial services industry has the largest number of captives. Likewise, phar-maceuticals, infrastructure and telecoms are significant captive users. In the GCC, it is more difficult to say at this stage, but there is a trend

for energy-related companies, especially those with significant oil and gas interests, to form captives. When you think that the region has more than 60 per cent of the proven oil reserves in the world, then this is an area that has obvious potential.”

DomicilesA captive can only be established in domiciles that have passed laws and regulations permit-ting them. Currently, there are more than 70 onshore and offshore domiciles around the world offering captive insurance licences. Of these, the largest is Bermuda, where Reiss set up the first captive management firm, followed by the Cayman Islands and then the US state of Vermont.

A total of 23 other US states have captive insur-ance regulations in place. Generally, but not always, companies tend to set up captives within the continent in which their headquar-ters is based as they prefer their captives to be licensed in a location within reasonable travel-ling distance of their headquarters.

Each domicile offers different regulations such as lower licensing costs and capitalisa-tion requirements. Some are popular for their flexible regulatory regime, while for others, the presence of a robust regulator with a good track record is the key selling point. Offshore domiciles also offer several tax incentives.

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Middle East domicilesThere are currently three domiciles offering captive insurance licences in the GCC: Bahrain, under licence from the Central Bank of Bahrain; the Dubai International Financial Centre (DIFC); and the Qatar Financial Centre (QFC). Recently, Jordan became the first Arab state outside the GCC to establish a captive regime under the authority of the Insurance Commission of Jordan.

All domiciles have a regulator to oversee and regulate captives, ensure they function and act within the bounds of legislation and rule-books set by the regulator itself and make sure they operate to the highest standards of finan-cial governance. In the case of the DIFC, the reg-ulator is the Dubai Financial Services Authority (DFSA). In Bahrain, it is the Central Bank of Bahrain, while in Qatar it is the Qatar Financial Centre Regulatory Authority (QFCRA). A more detailed look at the regulator’s position can be found on pages 16-17.

In Qatar and Dubai, there is additionally the QFC Authority and the DIFC Authority, which are responsible for the development and enforce-ment of regulations not falling under the remit of the QFCRA or DFSA. Typically, these regula-tions cover employment, arbitration, insolvency, companies, contracts and data protection rules, plus civil and commercial disputes.

All three GCC captive domiciles are similar in some respects in that application, annual fees and base capital requirements only differ by a small amount in each domicile and in some cases not at all. The DIFC and QFC for example – two domiciles that may be considered the regional heavyweights in this area – have largely the same definition for the first three classes of captives.

However, in a number of other areas, there is a divergence in the regulations. The trend is for this divergence to grow as the domiciles attempt to differentiate themselves to the cur-rently limited captive insurance market.

its Captive Insurance Business Rules (CAPI) 2011 in early July this year, which saw the lowering of base capital requirement costs for Class 2 captives from $1m to $400,000. It also resulted in the creation of a new Class 4 cap-tive that enables the formation of non- conventional captives, which do not meet the criteria of the other classes, but which the QFCRA believes can operate effectively. The new class is a first for the region and offers a degree of flexibility in captive structuring that was till now formally unavailable.

The move has been welcomed by the special-ists. “Effectively, the cluster [Class 2] captive only allows you to write 20 per cent of non-group business,” says Hodgins. “But if you’re looking at joint ventures, you are not just look-ing at the group anymore. The revised regime at the QFC potentially allows some scope to allow industry style captives, where people with similar interests will have a shareholding in the captive. This has previously been a potential stumbling block for the joint venture structure: whether or not you want to have shares with every joint venture member.

“From the regulator perspective, this kind of structure is not a bad bet. Who best under-stands the risks of a joint venture than the partners themselves? The captive providing insurance could probably do at least as good a job if not a better job than a commercial insur-ance company.”

In another regional first, the updated CAPI per-mits banking letters of credit (LoCs) to be used as a form of eligible capital for potential QFC captives. This was an important step forward in the development of captive insurance in the Middle East as reinsuring captives have had to make payments in the past to an escrow account, used as collateral against failure to pay its obligations to a fronting issuer. The problem with the escrow set-up is that the cap-tive has no control over the investment or little right to earn income from it.

For instance, DIFC-domiciled captives are not allowed to insure risks outside the domicile, while those in the QFC and Bahrain can. Like-wise, DIFC captives have to be based in the DIFC district, while there is greater flexibility, and lower rents, for captives in Bahrain and Qatar in deciding where to locate.

Perhaps the best example of a growing regula-tory divergence was the QFCRA’s updating of

The regional captive market

“There are three domiciles offering captive licences in the GCC: Bahrain, the QFC and the DIFC”

GCC domicile: Dubai International Financial Centre

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$1=BD0.376. ICJ=Insurance Commission of Jordan; QFCRA=Qatar Financial Centre Regulatory Authority; QFCA=Qatar Financial Centre Authority; DFSA=Dubai Financial Services Authority. Sources: MEED Insight; Marsh; Kane; QFCRA; DFSA; ICJ; Clyde & Co

Comparison of GCC captive domiciles

Qatar Financial Centre Dubai International Financial Centre Central Bank of Bahrain

Licences available

Class 1 Captive: A single parent company that writes only contracts of insurance in respect to risks related to its owner and/or affiliates

Class 2 Captive: A captive that can write up to 20 per cent of gross written premium from third-party risks, in addition to the risks of its owner and/or affiliates

Class 3 Captive: A multi-owned captive underwriting only the risks of its owners and/or affiliates, usually within a specific trade or activity

Class 4 Captive: A non-conventional captive, established by the QFCRA, that does not meet the requirements of other captive classes, but which satisfies certain QFCRA criteria on operating effectively

Protected Cell Company (PCC)

Class 1 Captive: A single parent company that writes only contracts of insurance in respect of risks related to their owner and/or affiliates

Class 2 Captive: A captive that can write up to 20 per cent of gross written premium from third-party risks in addition to the risks of its owner and/or affiliates

Class 3 Captive: A multi-owned captive underwriting only the risks of its owners and/or affiliates, usually within a specific trade or activity

Protected Cell Company [PCC]

Captive insurance

Base capital requirements

Class 1 Captive: $150,000



Class 4 Captive: $1m

Non-cellular PCC: $50,000



Class 3 Captive: $1m

Non-cellular PCC: $50,000 (each cell must also have base capital of $50,000)

Class 1 Captive: BD75,000

Class 2 Captive: BD300,000

Application fees

Captive Classes 1-4: $5,000

PCC core: $8,000

Individual PCC cell: $1,000

Captive Classes 1-4: $5,500

PCC core: $8,000

Individual PCC cell: $1,000

BD100

Annual fees As application fee As application fee BD1,000

Other fees At discretion of QFCRA dependent on complexity of supervision

0.1 per cent for each $1m of expenditure

Ownership No restrictions on foreign ownership No restrictions on foreign ownership No restrictions on foreign ownership

Insurance outside the domicile

No restrictions on QFC-domiciled captive insuring risks in Qatar

Can only insure risks within the DIFC No restrictions on insuring risks in Bahrain

Location Captives can be located anywhere within the Qatari borders

Captives must be located within the DIFC district

Captives can be located anywhere in Bahrain

Solvency margin requirements

Captives must maintain a minimum capital equal to or greater than their base capital requirement or what is determined by a risk-based capital calculation

Captives must have adjusted capital resources greater than the amount determined by their minimum capital requirement

Must be equal to or greater than the base capital requirement

Reserve requirements

None None 10 per cent of annual profits

Taxation Tax exemption for captives Tax free for first 50 years of operation None

Regulation regime

The QFCRA is responsible for the supervision of captives. Regulations outside the QFCRA remit are enforced by the QFCA. Civil and commercial disputes are handled by the QFC Civil and Commercial Court

Regulation of captives is overseen by the DFSA. Regulations outside the DFSA remit are handled by the DIFC Authority. Civil and commercial disputes are handled by the DIFC courts

The Central Bank of Bahrain handles all regulations. Two separate tribunals deal with any civil or commercial disputes

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The first captive in the Gulf region itself was set up in 2003 by Qatar Petroleum (QP) when it founded Al-Koot Insurance & Reinsurance Company as its 100 per cent owned captive subsidiary. Self-managed, Al-Koot remained the captive insurer of QP until 2007 when ownership of it was transferred to Gulf Interna-tional Services Company (GIS) as part of a pri-vatisation process, in which 70 per cent of ph

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shares in GIS were transferred to the public in an IPO. Although Al-Koot is no longer strictly a captive of QP, it still effectively acts as if it were the national oil company’s captive insurer and acts as a consultant on its insurance needs.

Al-Koot was a landmark in the development of captive insurance in the region, but equally important was the formation in 2007 of Tabreed Captive Insurance Company (TCIC), the wholly owned captive of Abu Dhabi-based district cooling firm Tabreed.

The new captive was established in co-ordina-tion with Ensurion, the Bahrain-based insur-ance management company. Under licence from the Central Bank of Bahrain, TCIC was key in the development of captive insurance in the region, serving as a catalyst for several other companies to follow suit.

“District cooling is a capital intensive business requiring large amounts of investments,” says Mohamed Saif al-Mazrouei, chairman of Tabreed, explaining the rationale for setting up

Algiers: The group captive launched in Algeria in 1999 grew into a standalone insurer in its own right

The move means firms looking at setting up a captive will potentially have more flexibility in meeting the subsidiary’s capital and collateral requirements. What’s more, although the new rule changes only specifically reference LoCs, the QFCRA has the discretion to permit other forms of eligible capital.

Ultimately, there are a number of factors com-panies have to consider when choosing a dom-icile. “The specific benefits afforded by any particular domicile will depend on the require-ments and circumstances of the individual cli-ent,” says Brook. “In order to assess the partic-ular advantages or disadvantages of a location, it would be necessary to conduct a full feasibil-ity study for the particular client.

“I would, however, add that each of the domi-ciles in the region has put in place a robust leg-islative framework for captives, which is based on the best practice elements laid down by some of the longest standing players in the cap-tive arena. These regimes are ably supported by proactive regulatory authorities keen to make the sector an integral part of their overall financial services. In addition, they offer a range of world class service providers and highly sophisticated infrastructure to ensure that all the key components of a successful captive market are in place.”

existing captives Captive insurance has been growing steadily in the Middle East since the establishment in 1999 of the Compagnie d’Assurance des Hydrocarbures (Cash) in Algeria as a group captive owned by the Ministry of Energy & Mines and the Ministry of Finance. Its initial role was to insure the projects of Algeria’s state-owned energy company Sonatrach and its third-party joint venture partners, but it has since branched out to insuring other state-financed capital projects and insurance to members of the public. As such, it is a good example of a captive that has grown beyond its original remit into a standalone insurer in its own right.

Cash was followed in 2001 with the establish-ment of Bermuda-based Stellar Insurance, the wholly owned special purpose captive insurance vehicle of Saudi Aramco, a Class 3 insurer which has a capitalisation of more than $500m. At the same time, Sabic estab-lished its own captive, setting up Sabic Captive Insurance (Sabcap) in the domicile of Guernsey.

“The increase in the number of cap-tives points to the fact that interest in the concept is gain-ing momentum”

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Riyadh: Saudi Arabia is yet to permit captive activity

TCIC. “The long-term, asset-intensive nature of our business requires that we excel in financial planning and risk management.”

Next to be created in 2008 was Dubai Holding Insurance Services PCC, a protected cell com-pany licensed and regulated by the DIFC, with Dubai government-related entities Jumeirah Group, Tatweer Dubai, Tecom Investments, Sama Dubai and Dubai Properties as the cell shareholders and Dubai Holding as the core shareholder. US insurance giant Marsh is the captive manager.

Another interesting development took place a year later with the establishment of Masheed Captive Insurance Company, the captive subsid-iary of Saudi Readymix Concrete Company.

DIFC=Dubai International Financial Centre; NA=Not applicable. Source: MEED Insight

Captives owned by GCC companies

Captive Domicile ParentHeadquarters of parent

Year established

Captive manager

Type of captive

Paid-up share capital ($m) Remarks

Stellar Insurance Bermuda Saudi Aramco

Saudi Arabia 2001 Not available

Single Not available First overseas captive established by a regional company

Sabic Captive Insurance Company

Guernsey Sabic Saudi Arabia 2001 Not available

Single Not available

Al-Koot Insurance & Reinsurance Company

Qatar Qatar Petroleum

Qatar 2003 Self-managed

Group Not available Following privatisation in 2007, it is no longer strictly defined as a captive

Tabreed Captive Insurance Company

Bahrain Tabreed UAE 2007 Ensurion Single 2.2 First regional captive by a non-energy sector parent

Dubai Holding Insurance Services PCC

DIFC Dubai Holding

UAE 2008 Marsh Protected cell company

Not available First protected cell company in the region

Masheed Captive Insurance Company

Bahrain Saudi Readymix

Saudi Arabia 2009 Ensurion Single 1.6 First captive set up in the region by Saudi parent

MDC (Re) Insurance

DIFC Mubadala UAE 2010 Marsh Single 2

ACWA Power Reinsurance Company

DIFC ACWA Power International

Saudi Arabia 2011 Marsh Single 0.8

Global Star PCC DIFC Ruan Janse van Rensburg

NA 2011 Marsh Protected cell company

0.3 First protected cell company in the region owned by an individual

Woodstock Insurance Company

Isle of Man

Kuwait Petroleum International

Kuwait Not available

Aon Single Not available Only captive owned by a Kuwaiti parent

Like TCIC, it is licensed and regulated by the Central Bank of Bahrain and managed by Ensu-rion. Masheed was the first case of a regional firm electing to establish a captive in a GCC domicile different from its own geographical location. While Saudi Arabia has long been looked upon as an ideal location for captives, the government has not yet issued any regula-tions permitting captive activity in the kingdom.

A number of other captives have been estab-lished over the past two years, including MDC (Re) Insurance and ACWA Power Reinsurance Company, both at the DIFC. While the develop-ment of captive insurance has been slow to pick up in the region, the increase in the number of captives points to the fact that interest in the concept is gaining momentum.

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“We already had an adequate and robust regu-latory regime, but when you looked at other typical captive jurisdictions that are particu-larly successful [such as Bermuda], it probably wasn’t a regime that provided the same level of flexibility,” says Morris, who is director of pol-icy at the QFCRA. “For this reason, we under-took a review of our captive regime to help make it more attractive and to bring it into line with the QFCA’s focus on bringing captives to the QFC and Qatar. Our role is to put appropri-ate legislation in place to support the strategy of QFCA, while at the same time ensuring that our regulation is aligned with the best interna-tional standards that are required by our regu-latory objectives.”

The new CAPI rulebook, particularly the per-missibility of the new Class 4 captive, has been widely praised by industry specialists who

New regulatory frameworkAs the officials responsible for developing new captive insurance regulation and super-vision at the Qatar Financial Centre Regula-tory Authority (QFCRA), Prue Morris and Henderson Adams had the crucial task of for-mulating new rules within which captives have to operate, while overseeing their opera-tions to ensure adherence to these regulations. In the event of regulatory breaches, the QFCRA has the necessary powers to take appropriate enforcement actions.

Given the Qatar Financial Centre Authority’s (QFCA) focus on captive insurance as one of its three hub development strategies – the others being reinsurance and asset management – the regulator’s role is particularly key in ensuring the fine balance between providing the regula-tory flexibility to attract potential captives to the QFC and maintaining a regulatory and supervisory robustness that provides a sup-portive framework for them.

The new captive regime commenced on 1 July 2011 and adopts greater flexibility than the QFC’s previous regime. To this end, the QFCRA, after two consultation periods throughout 2010 and 2011 that took in the views of the market, created a new rulebook in July 2011 solely for captives, its Captive Insur-ance Business Rules (CAPI) 2011.

Perhaps the most important changes to the rules were the lowering of base capital require-ments for Class 2 captives from $1m to $400,000, and the creation for the first time in the region of a new Class 4 captive, enabling the formation of non-conventional captives that do not meet the criteria of other Classes, but which the QFCRA believes can operate effectively as a risk management tool. In another regional first, the updated CAPI per-mits banking letters of credit (LoCs) to be used as a form of eligible capital for potential QFC captives, subject to certain criteria being met (see Middle East Domiciles section, page 12).

recognise the need for a more localised as well as flexible approach. The three existing captive classes that had been hitherto the norm across the three GCC domiciles were seen as too rigid for the needs of certain companies. In a region with a massive amount of capital projects spending, this was particularly the case for companies working on projects in joint ventures with other parties. Previous regula-tory regimes made it difficult to permit joint venture partners to form a captive because the rules did not consider them to be sufficiently related or aligned, even though they want to insure a joint risk. The QFCRA’s new rules pro-vide more flexibility for members of joint ven-tures to take shareholdings in a captive and should in theory open up the market to compa-nies involved in the projects sector as well as other firms that want to underwrite more than 20 per cent of third party risks.

The Class 4 captive also provides the QFCRA with the flexibility to assess more innovative captive insurance structures on a case-by-case basis by taking into account factors such as the captive’s business rationale, how it will be used as a risk management tool and the appro-priateness of the proposed captive structure.

“The consultation process carried out in co-ordination with stakeholders, advisers, indi-viduals and clients, both regionally and inter-nationally, provided very clear proof of the need to have flexibility,” says Adams, QFCRA’s director of insurance. “When we looked at updating the rules for captives, it was apparent that globally there are so many different cap-tive structures that if you tried to define all of them, it would be a very long list. So we decided we would provide the Class 4 captive which would have the potential to capture any type of structure at our discretion, provided it meets certain criteria.”

At the heart of the changes is an understanding that a more localised approach is needed.

The regulator’s position

“The new rules provide more flex-ibility for members of joint ventures to take shareholdings”

Rulebook: The regulations will benefit joint ventures

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“A talking point is the impact the Solvency II Direc-tive will have on EU-domiciled captives”

When captive regulations were first estab-lished in both the DIFC and QFC, they were largely mirrored on those imposed by the UK’s Financial Services Authority (FSA) and pro-vided a similar regulatory approach to that used for a direct insurer. This was an under-standable stance for domiciles which wanted to establish best-in-class regulatory regimes. But the UK is a wholesale market, and has an economy and a corporate sector many times larger than the UAE or Qatar or even the region as a whole. What works for a developed market might not be successful for a developing one.

“As a smaller developing market, we are trying to strike a balance,” says Morris. “We look at a spectrum of jurisdictions and then decide on different areas that are particularly relevant to the QFC jurisdiction. Sometimes this may mean adopting some UK regulations, in others it may be Singapore or Bermuda. Our regula-tions reflect the best of a lot of other jurisdic-tions, and are customised in a manner that aligns with the needs of Qatar.”

Right now, one of the biggest talking points in the captive industry is the potential impact the

Solvency II Directive will have on EU-domi-ciled captives. From a regulatory perspective, many captives are keen to understand how non-EU regulators will respond to Solvency II and whether they will follow suit in their own regulatory regimes.

As a member of the International Association of Insurance Supervisors (IAIS), an organisa-tion representing insurance regulators and supervisors in more than 190 jurisdictions, the QFCRA works alongside other regulators to ensure best practice in the industry and adher-ence to the best international standards. Global regulators are reviewing the points raised by Solvency II, but it is likely that any changes to solvency and capital requirements will be made independently of Solvency II and are also likely to be better adapted to local needs.

“As an active member of the IAIS, we look at broad international standards and we review and benchmark ourselves against adopted core principles, because it is important for us to be aligned with them,” says Adams. The other rel-evant aspect is that the IAIS has a project called ComFrame to create a common framework that

is intended to provide a regime for internation-ally active insurance groups.

“So from our point of view – like other juris-dictions – we are monitoring international standards and want to adhere to the newly approved insurance core principles and stand-ards. We have an existing regime for insurers called the Prudential Insurance Rule Book (PINS), which has capital requirements under it, so we periodically review these aspects.”

The big unanswered question in the industry is what impact the directive will have on driving currently EU-domiciled captives into other jurisdictions. All three GCC captive domiciles could potentially house them, especially those captives whose parents have business in the region or whose business straddles Asia and Europe. The QFCRA this year reconfirmed with its new CAPI rulebook that it will permit foreign captive insurers to re-domicile to the QFC, pro-vided the captive meets the requirements of QFC’s companies’ regulations and the authori-sation criteria and CAPI rules of the regulator.

“We have heard a lot of talk that captives may wish to re-domicile and what we focused on is providing the regulatory framework to support the QFCA hub strategy and having the frame-work in place to support whatever decision captives make in terms of re-domiciling,” says Morris. “We do have re-domiciling legislation and we have the framework to facilitate what-ever decisions a company in the EU might take. We’re ready for any applications and for any prospective applicants.”

Ultimately, no one knows what the impact of Solvency II will be, but it is clear that the Gulf domiciles are ready to receive any applications if and when they come. It is also true to say that should a number of EU captives re-domicile to the region, it will be a reflection of the growing maturity of its domiciles and their regulatory regimes, and may in itself be the catalyst for organic regional growth in the captive industry.

Jurisdiction: All three GCC domiciles could potentially house captives currently domiciled in the EU

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Captive development in the regionThere is no denying that captive insurance has yet to really take off in the region. With regula-tions being in place since 2004, the limited number of captives in the region is far below what was initially hoped. Even today there are few signals that the process of developing cap-tives in the region is accelerating.

Many would argue that this is not surprising given the region’s developing market status. An assessment of the BRIC (Brazil, Russia, India and China) economies highlights that captives are not prominent in those geogra-phies either. Even in some advanced econo-mies, the captive concept simply has not taken hold; Japanese firms, for example, have very little captive utilisation.

On a broad level, there are several reasons for this. In emerging markets, there tends to be a highly competitive local insurance market keeping premiums down and therefore the incentive for companies to explore other risk options open to them.

At the same time, local regulations frequently restrict the ceding of risk to captive subsidiaries. In India, for example, companies can only have their risk insured by an Indian company, which in turn can only have the risk reinsured by another Indian firm. A good regional example of this is the UAE, where DIFC-domiciled captives cannot provide insurance services outside the DIFC, other than by way of reinsurance.

Another factor is that the commercial environ-ment in emerging markets is generally less liti-gious than the developed economies, allowing for less risk in certain areas owing to fewer lia-bilities. Companies in these markets generally have to set aside fewer provisions than their Western counterparts.

While the same runs true for the Middle East, there are other region-specific issues that have an impact. Perhaps the biggest impediment to captive growth is simply a lack of awareness of the captive concept or the benefits that it can provide companies. Due to this lack of educa-tion and the absence of a critical mass of compa-nies in the region employing captives, there is a lack of general exposure of the captive concept.

“There is little understanding in the region of what captives are or the benefits they can bring,” says George Belcher, an insurance specialist at international law firm Dewey & LeBoeuf.

“The insurance industry in the region is still relatively young. The tendency histori-cally has been to cede risk out to the Western insurance markets. This is certainly quick and easy, but it is often not the most cost-effective approach.

“Insurance is an area that has developed and will continue to develop as the regional economy matures. I predict that we will see increasing retention of risk in the region across the board, not only by regional insur-ers/reinsurers, but also by regional businesses (or groups of businesses). The latter can man-age this retained risk by establishing a cap-tive, which is effectively an in-house insurer.”

Clyde & Co’s Hodgins agrees: “A lack of aware-ness of insurance and risks that are borne by the business is the main challenge,” he says. “But this is changing as we see insurance pene-tration growing in the GCC.

“I think also that one of the key factors else-where is not present in this region; that is that group companies here can be very tax effi-cient, and given the tax regime in the region, the large regional companies don’t necessar-

Risk: Emerging markets are generally less litigious

ily have the same driver here to consider cap-tive insurance.”

The lack of corporate taxation in the region is a key factor. One of the key drivers for the take up of captives in other jurisdictions is the tax bene-fits captives can provide. However, with low to no tax in the Middle East, this is simply not much of a factor for companies to consider.

Nonetheless, captive managers believe cap-tives can provide tax benefits to companies, particularly those with international opera-tions. “Tax is definitely a consideration in other parts of the world because you can actu-ally structure your captive to the benefit of the group,” says Marsh’s Vellekoop. “Here you don’t have tax, but you can still make the cap-tive work, particularly if your assets are here. For example, some GCC-based groups own assets all round the world. Such groups can insure those assets, and because the premium is paid in the overseas jurisdiction, it is tax deductable as a cost for that operating entity. If it comes here and the captive makes a profit for the group, it is tax free. So there can definitely be a tax benefit from captive formation.”

The prevalence of absorbing risk in-house through companies’ own insurance subsidiar-ies is another factor. Family-owned businesses, in particular, over the years expanded into a number of different industries, and as they have grown they have branched into insur-ance. Today, there are more than 150 insurance and reinsurance firms operating in the GCC. Clearly for many of these groups, there is little incentive to form captive subsidiaries as they are already effectively employing them.

“A lot of the large family businesses in the region already own insurance companies,” says Hodgins. “While these are not necessarily cap-tive insurance companies, they do recognise and cover the risks borne within their group compa-nies. Already having their own insurance arms should not be considered an impediment. They can use a captive to re-insure their group com-pany or the other way around. What the captive allows you to do is insure or re-insure a risk or risks that are difficult to buy. A captive is a good way to manage that exposure.”

It can be argued that the presence of many ‘in-house’ insurers may act as an artificial impedi-ment to the growth of the captive industry because these conventional insurers see the development of captives as a threat to their business. While this may not be such an

“The tendency historically has been to cede risk out to the Western insurance markets”

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02 Chapter.indd 18 16/11/2011 18:19


Middle East: The fact that natural disasters are rare in the region has contributed to relatively low premiums

important factor in the UAE, where captives cannot insure risk outside the DIFC domicile, it may be a factor in Qatar and Bahrain where there are no such limitations.

This is an argument that does not carry a lot of weight among the experts. “Yes, a lot of them [local insurers] might see a captive as a competi-tor, but that is not necessarily a good under-standing,” says Clyde & Co’s Hodgins. “It does not necessarily follow that just because it is a captive that the local players are not going to involve themselves. It depends on the nature of the risks. If you look at local insurance compa-nies, then they tend to heavily re-insure them-selves. So actually what they will be doing for captive is not much different. Lots of insurance programmes are placed with reinsurance com-panies first and then find a local company which is what a captive will be doing.”

The region is also marked by a low catastrophe risk. Compared with other parts of the world,

the region is more geological and meteorologi-cally stable. Cyclone Gonu aside, which caused severe damage to Oman in 2007, natu-ral disasters are very rare in the region.

This has been an important contribution to the relatively low premiums that the region enjoys compared with the rest of the world. When premiums are low, there is less incentive for captives to be developed, although given the cyclical nature of the insurance sector, this will not always be the case.

“The region, as elsewhere, is experiencing a soft market,” says Dewey & LeBoeuf’s Belcher.

“The savings made upon establishing a captive on premium that would otherwise be payable to a third-party insurer are not as pronounced as in a hard market where premiums are high. However, this is a temporary phenomenon rather than a long-term obstacle to the develop-ment of the sector.”

It has been claimed that one of the reasons the insurance industry is still relatively immature in the region is religious or cultural. Part of this is down to Islamic restrictions on certain forms of insurance due to the prohibition on gharar, loosely translated as making hazardous or inherently risky transactions. Because insur-ance is, by definition, mitigating an uncertain risk, some claim there has been an historical impediment for it to spread in the region.

But this is dismissed by the experts who argue that there is no evidence that companies have been reluctant to insure their risks and that, in any case, sharia-compliant insurance solutions exist if firms are concerned.

“Most of the government entities don’t use takaful insurance; they just want to have the best terms and conditions in order to protect their assets – so, no, I don’t think sharia com-pliance is an issue,” says Marsh’s Vellekoop. “Most takaful companies seem to focus on family insurance products and less on com-mercial insurance products purchased by large corporations.

“As the market currently stands, takaful may be used to insure a small-sized business, but it is very difficult for large corporations because they may not have the capacity or wording to fulfil their requirements. Most large corporations seem to prefer the tradi-tional way of insurance.”

In short, there are a number of different reasons to explain the slow take-up of captive insur-ance in the region. But none of them in them-selves are inherent impediments to the devel-opment of the sector. The increasing number of domiciles and greater flexibility in regulations combined with the growing number of cap-tives and a better awareness of the captive insurance concept should ensure the sector’s growth over the coming decade.

“There are a number of different reasons to explain the slow take-up of captive insurance”

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02 Chapter.indd 19 16/11/2011 18:19


The case for captives in the GCCWhile captive insurance has been slow to take off, conversely this also means there is plenty of scope for it to grow. This particularly rings true, given the relative immaturity of the insur-ance sector as a whole in the region, compared with its relatively high gross domestic product (GDP) growth and high GDP per capita rates.

The Middle East remains relatively underin-sured. The total spent on insurance in the GCC is about 1.2 per cent of total GDP, far lower than the 7-8 per cent equivalent figure seen in Europe or the US. Life insurance accounts for just 12-15 per cent of insurance spend, compared with an average of 58 per cent elsewhere.

As a recent World Bank report on the insur-ance sector states: “The Mena insurance mar-ket seems excessively fragmented in some countries and this may have also hindered the sector’s development. There seem to be too many companies sharing very small markets. As a result, insurance companies seem unable to generate scale, retain a sufficient volume of premiums, build meaningful risk pools, under-writing capacity and innovate.

“Many insurance companies seem to act sim-ply as brokers or front offices, reinsuring most of the business. The volume and levels of human capital also remains weak in most coun-tries, hindering the sector’s development.”

The high level of fragmentation and the rela-tively low penetration rates tend to suggest that a certain number of companies are retain-ing an undetermined amount of uninsured risk on their balance sheet. In most cases, this is most likely not deliberate, but rather due to a lack of awareness of this ‘trapped’ potential value and the various options and mecha-nisms that this value can be utilised. How-ever, there is mounting evidence that this is changing as companies come to terms with

The case for captives in the GCC

Insurance premiums and assets (% of GDP), 2009

Country Non-life premium Life premium Assets

Algeria 0.60 0.05 0.8

Bahrain 1.43 0.70 12.1

Egypt 0.42 0.37 3.9

Jordan 1.53 0.21 4.8

Kuwait 0.34 0.09 1.8

Lebanon 2.18 0.98 7.2

Libya 0.48 0.01 -

Morocco 1.54 0.89 19.0

Oman 0.97 0.20 2.4

Qatar 0.67 0.01 2.7

Saudi Arabia 0.46 0.07 -

Syria 0.92 0.01 0.0

Tunisia 1.38 0.25 0.6

UAE 1.34 0.28 3.1

Yemen 0.24 0.02 -

Mena 0.97 0.28 5.3

GCC 0.87 0.23 4.4

Non-GCC 1.03 0.31 6.1

Oil 0.80 0.16 3.8

Non-oil 1.22 0.45 7.1

Mena=Middle East and North Africa. Source: World Bank

Mena=Middle East and North Africa; OECD=Organisation for Economic Co-operation & Development. Source: World Bank

Average penetration rates and assets (% of GDP), Mena and other regions

Mena East Asia & Pacific

New EU-10

countries

Other Europe &

Central Asia

High income

OECD

Latin America

South Asia

Average non-life premium

0.97 0.8 1.7 0.9 2.3 1.3 0.5

Average life premium

0.28 1.6 1.1 0.1 4.0 0.7 1.2

Average assets

4.9 14.8 5.2 2.7 45.0 4.9 6.4

Saudi Arabia 0.46 0.07 -

03 Chapter.indd 20 16/11/2011 18:24


Indicators of industry structure

Number of insurers

Country Total Non-life Life Composite

% of non-life market held by the top three insurers

Share of state-controlled

companies

Algeria 15 na 1 14 62 72

Bahrain 36 29 3 4 43 0

Egypt 28 15 10 3 69 61

Jordan 28 10 1 17 25 0

Kuwait 29 14 2 13 46 0

Lebanon 54 18 5 31 31 0

Libya 9 na na 9 80 44

Morocco 18 8 1 9 47 0

Oman 23 12 2 9 57 0

Qatar 9 6 na 3 95 0

Saudi Arabia

26 NA NA NA 43 22

Syria 13 9 9 13 53 47

Tunisia 17 3 2 12 49 20

UAE 57 NA NA NA 23 0

Yemen 12 2 na 10 67 14

Mena average

25 11 4 11 52 na

OECD average

179 40 106 33 na na

Mena=Middle East and North Africa; na=Not available; NA=Not applicable; OECD=Organisation for Economic Co-operation & Development. Source: World Bank

CAGR=Compound average growth rate. Sources: Swiss Re; Central Bank of Bahrain; BMI

Comparison of CAGR of total premiums, 2005-09

(%)

0

5

10

15

20

25

30

Japan

Europ

e

North A

merica

India

Kuwait

Qatar

Saudi

Arabia

China

Bahrai

nUAE

Oman

30

25

20

15

10

5

0

this potential value and premium and pene-tration rates grow.

Premiums have been rising significantly over the past half decade in the region, albeit from a low base, far outpacing premium growth in the world as a whole. For instance, between 2005 and 2009, the compound aver-age growth rate (CAGR) for premiums in the GCC rose by just over 20 per cent, compared with a global average of 4.3 per cent in the same period. This includes a 30 per cent CAGR for premiums in Saudi Arabia and 26.4 per cent and 25 per cent in the UAE and Qatar respectively (see table on lower left).

“The Mena insurance market seems excessively fragmented in some countries”

03 Chapter.indd 21 16/11/2011 18:23



Historical trends elsewhere highlight that cap-tive insurance grows in parallel with the devel-opment of the insurance market as a whole. As the Middle East insurance sector matures and penetration rates increase, so too is the expec-tation that interest in captives will gather pace.Growth in the insurance sector as a whole is a function of economic and population growth.

With a young population, high oil prices and booming economies, the GCC is expected to continue its run of high population and eco-nomic growth over the coming half decade. As the population and economies grow, so will insurance premiums.

f=Forecast. Sources: Swiss Re; Central Bank of Bahrain; BMI; Alpen Capital

GCC insurance premiums by type, 2005-12

($bn)

0

5

10

15

20

25

20052006

2008201

1f201

2f2007

2009201

0

25

20

15

10

5

0

Life Non-Life

CAGR=Compound average growth rate; GDP=Gross domestic product. Sources: IMF; World Bank; Alpen Capital

Five-year CAGR forecast for GCC population and GDP

(%)

0.00

0.03

0.06

0.09

0.12

0.15

Bahrai

nKuw

aitOman

Saudi

Arabia UAE

Qatar

15

12

9

6

3

0

Population GDP

“Growth in the insurance sector is a function of economic and population growth”

03 Chapter.indd 22 16/11/2011 18:23


“Total GCC premiums will rise to close to $37bn in 2015 from $18.5bn in 2011”

Source: Alpen Capital

GCC premium growth forecast, 2010-15

Insurance premiums ($m) Premium growth (%)

0

10000

20000

30000

40000

0.150

0.175

0.200

0.225

0.250

2010

2011

2012

2014

2015

2013

40,000

30,000

20,000

10,000

0

25

22.5

20

17.5

15

Life premium Non-life premium Total premium growth


GCC life and non-life penetration rates forecast, 2011-15

Penetration rate (%)

0.000

0.005

0.010

0.015

0.020

2011

2012

2013

2014

2015

2.0

1.5

1.0

0.5

0

Life Non-life

Dubai-based investment bank Alpen Capital forecasts that total GCC premiums will rise to close to $37bn in 2015 from $18bn in 2011, a 20 per cent CAGR over a five-year period, with non-life insurance comprising 86 per cent of the premium total.

Insurance penetration and density levels are projected to increase accordingly, with non-life penetration anticipated to grow to 1.8 per cent in 2015 from 1.12 per cent in 2011 and non-life density rising to $690 from $378 over the same period.

03 Chapter.indd 23 16/11/2011 18:22



On a country-by-country basis, total premiums are expected to grow substantially, more than doubling in Qatar and the UAE and growing between 40-50 per cent in the other GCC states between 2011 and 2015. Qatar is projected to experience the highest growth with a CAGR of 30 per cent over the same period, spurred pri-marily by a substantial increase in infrastruc-ture spending as a result of the 2022 World Cup and considerable GDP growth.

This overall growth in the GCC insurance mar-ket and total premiums should result in a natu-ral evolution of the sector as it becomes more sophisticated. As the market grows and matures, there should be an equivalent and natural momentum toward the development of captive insurance.

Other factorsThere are several other factors pointing to the growth of captive insurance in the region. Over the past decade, as governments have modern-ised their economies, many previously govern-ment-owned organisations have been priva-tised or spun off into their own entities. This has been a practice particularly prevalent in the UAE, where dozens of government-related entities were established to engage in specific activities and industries.

Where previously such bodies enjoyed catch-all government insurance, their transformation into companies has meant they have had to seek separate insurance policies for themselves and for their assets. The Dubai Holding captive was an attempt to meet the insurance needs of many of its new subsidiaries formed in the wake of the emirate’s real-estate boom.

The region’s captive growth potential has been equally assisted by the development of a more robust and mature regulatory regime in the rel-evant domiciles. Prior to 2004, it was simply not possible to establish a captive due to an absence of appropriate regulations.

As the regulations and domicile regimes in the region have matured, so too have they become more on a par with international standards. The QFCRA’s recent rule changes, which include the creation of a single rule-book for captives enabling Class 4 captives and extension of LoCs as collateral, is a good example of the continual evolution of a regu-latory regime as it seeks to meet the needs of the market while maintaining adequate super-vision and regulations.


GCC life and non-life density forecast, 2011-15

($)

0100200300400500600700800

2011

2012

2013

2014

2015

800

700

600

500

400

300

200

100

0

Life Non-life

CAGR=Compound average growth rate. Sources: Alpen Capital; MEED Insight

GCC insurance premiums forecast by country

($m) (%)

0

5000

10000

15000

20000

15

20

25

30

35

Bahrai

nKuw

aitOman

Saudi

Arabia UAE

Qatar

20,000

15,000

10,000

5,000

0

35

30

25

20

15

2011 2013 2015 CAGR

With the establishment of captive regulations, the major captive insurance managers have followed. The likes of Marsh, Kane and Ensu-rion are all active in the regional market and play important roles in promoting and encouraging the captive insurance concept to companies.

At the same time, the regional economic boom and the expansion of companies in the region has led them to become more aware of risk man-agement strategies in general. As companies have grown, so too has a better understanding of the different risk solutions available in the mar-ket and the need to control rising premiums.

03 Chapter.indd 24 16/11/2011 18:22


Mandatory: Car insurance is the only obligatory line of insurance in Middle East states

Compared with many developed economies, mandatory insurance laws remain limited in the Middle East. Car insurance is the only insurance line obligatory in every country in the region, while mandatory coverage of other lines varies from country to country. As the table on page 26 demonstrates, the North Afri-can states along with Syria have the most stringent regulations, while in other coun-tries, mandatory insurance is limited to only a few specific instances.

Economic development and an evolution in business practices inevitably result in an extension of insurance rules to new lines. For example, the rising cost for the govern-ment of providing free or subsidised medical care in the UAE resulted in regulations passed in 2010, which compelled all compa-nies to provide medical insurance to their foreign employees.

Frequently, insurance provision falls under the aegis of ageing legislation. Increasingly, countries are introducing updated laws that extend mandatory insurance to new lines. Oman updated its 1975 insurance law in 2006. It was followed a year later by the UAE, which updated its original 1984 insur-ance legislation.

Insurance legislation in other GCC states are also due to change. Kuwait’s insurance law dates back to 1961, while Bahrain’s law was promulgated in 1987. Saudi Arabia’s legal sys-tem is based on sharia law and has no formal insurance regulations, although the authorities have been planning to introduce formal legisla-tion for some time.

As governments update their insurance legisla-tions, the number of mandatory insurance lines is likely to increase. Typically, the first compul-sory legislation to be enforced is other liability coverage where the public is exposed to com-pany risks. These tend to include insurance lines such as contractors all risks (CAR), public transport risks and professional liabilities.

The development of legislation and the GCC economy as a whole are likely to result in the imposition of additional mandatory insur-ance lines, which in turn are likely to add a greater burden to companies’ insurance requirements and therefore premiums. As has been seen in other parts of the world, this maturing of legislation and the insurance sec-tor in general is a catalyst for the development of captive insurance.

“Oman updated its 1975 insurance law in 2006. It was followed a year later by the UAE”

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*Property owners with mortgages in freehold areas must have life insurance. Source: World Bank

Mandatory insurance lines in the Middle East*

Algeria Bahrain egypt Jordan Kuwait Lebanon Libya Morocco Oman Qatar saudi Arabia

syria tunisia uAe

Expatriate medical expenses

x x

Fire and explosion x

Property

Registered entities x x

Marine cargo imports

x x x

Vessel and aircraft hull

x

Public liability

Hotels and restaurants

x x

Contractors all risk (CAR)

x

Registered entities x

Petrol stations x

Third-party liability

Motor liability x x x x x x x x x x x x x x

Public sector contractors

x

Lifting devices x x

Excursion/campsites

x x x

Hunters x

Goods and passenger carriers

x x

Workman’s compensation (WCA)

x x x x

Light aircraft testing

x

Pleasure craft x

Professional liability

x

Construction professionals

x x

Engineers x

Property decennial

Medical x x x

Accountants x

Lawyers

Insurance consultants

x x x x x x x x

Port operators x

03 Chapter.indd 26 16/11/2011 18:20


Infrastructure developmentThe other key area expected to be a potential major driver of captive take-up is the develop-ment of the Middle East’s projects market.

Since the oil price began to rise in 2002-03, the region has been rich in cash, much of which has been invested in the regional projects mar-ket. The result has been a massive projects boom that has seen hundreds of billions of dol-lars invested in new projects. Prior to 2008, the focus was on the Dubai real-estate sector, but since its crash the emphasis has been on social infrastructure and utility development in Saudi Arabia and Qatar.

Today, the GCC projects market alone is worth just under $1.8 trillion and growing. The boom has resulted in the construction of hundreds of new projects and presented dozens of contract opportunities for contractors. There is little doubt that this projects market growth has had a beneficial impact on the development of the insurance industry.

An analysis of the region’s captives set up so far in the region underlines the link with the projects market even though they operate in dif-ferent sectors. Saudi Aramco, Kuwait Petroleum International, Qatar Petroleum and Saudi Ara-bia’s Sabic are all project clients who have estab-lished captives primarily to ensure their facili-ties. The UAE’s Tabreed and Saudi Arabia’s Acwa Power are firms set up to build and oper-ate district cooling and power plants respec-tively. Saudi Readymix of course has benefited from the kingdom’s construction boom.

As the value of the assets of these companies has grown, they have looked to mitigate their risk in a more innovative manner by establish-ing captive subsidiaries. With the projects mar-ket continuing to grow, there is the rightful expectation that other project companies will follow suit.

Firms working in the projects field are particu-larly seen as prime candidates for captive for-mation. In many cases, the likes of contractors and project sponsors in the region are paying premiums based on global risk profiles rather than those specific to the Middle East. Given the region’s lower catastrophe, litigation risk profile and generally lower construction-related risks, in many cases companies are paying excessive premiums.

Data from regional projects tracker MEED Projects highlights that there are more than

Source: MEED Projects

Value of GCC projects planned or under way

($m)

0100000200000300000400000500000600000700000800000

Bahrai

nKuw

aitQata

rOman

Saudi

Arabia UAE

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

GCC projects planned or under way by sector

Construction

7

1

1

7

1%Infrastructure

Water and wasteMetal

Refining

Power

Oil and gas production

17

6

1

51

6

1

Values

Source: MEED Projects

Petrochemicals

Gas processing

Alternative energies

Pipeline

800 individual main contractors working on projects worth $50m or more in the GCC alone. Of these, just under 600 are regional compa-nies. Likewise, there are more than 800 project sponsors and clients with projects planned or under development worth more than $50m.

In total, there are more than 2,838 projects either under construction or planned in the region. The average budget value for each

scheme is $501m. For contractors, clients, subcontractors, suppliers and vendors, there are potentially thousands of companies active in the region with contractual commit-ments or liabilities worth hundreds of millions of dollars. If each firm has annual insurance premiums in excess of $3m, then there is a huge potential for captive insurance among companies engaged in the region’s massive projects drive.

03 Chapter.indd 27 17/11/2011 09:40



GCC projects market key figures

number of projects planned or under construction

number of clients and project sponsors

Average budget value of each project

number of regional contractors working on construction projects

Average contract value of projects under construction

2,838 814 $501m 599 $319m


solvency iiAlthough the focus has been on the growth of captive insurance subsidiaries among regional companies, the impending impact of the EU’s Solvency II directive is making the GCC domi-ciles an increasingly attractive proposition for European captives.

Adopted by the European Parliament in 2009 after the global financial crisis, Solvency II is aimed at strengthening the solvency and cap-ital requirements among insurance firms in the EU. The directive, which is due to come into force in early 2013, is based on three pillars covering quantitative and qualitative require-ments and the disclosure of information.

In essence, the quantitative aspect of Solvency II requires insurers and reinsurers to raise their minimum capital in order to reduce insol-vency risk. In addition, the qualitative aspect requires insurers to incorporate systems of gov-ernance to ensure an adequate management of risk, assess capital needs and ensure that the capital requirement is maintained.

Finally, Solvency II will require that insurers regularly publish two key documents, called the Solvency & Financial Condition Report (SFCR) and Report to Supervisors (RTS), as a means of improving public scrutiny of how the companies are managed.

As a result of the new requirements, many cap-tives currently domiciled in the EU could be negatively impacted by the new legislation. Captives based in Scandinavia, Malta, Luxem-bourg and Ireland face having to increase their statutory capital requirements by between 200-500 per cent. Across all impacted domi-ciles, the average statutory increase required will be 370 per cent, according to Marsh.

There will be many captives questioning the appropriateness and their own financial ability of increasing their minimum capital require-ments by a substantial amount. Moreover, Sol-vency II offers two major potential impacts for captives. The first pertains to counter-

Source: Marsh

Potential average capital increase for EU captives due to Solvency II

(%)

0

100

200

300

400

500

600

Irelan

dMalt

a

Luxem

bourg

Scandin

avia

600

500

400

300

200

100

0

trophe risk. A 100 per cent loss on a 1-in-200-years event is not considered a likely scenario by the industry and is therefore unwarranted.

“It’s too early to say definitively what the out-come of the Solvency II process will be,” says QFCA’s Randeva. “But according to the data we’ve seen, 80 per cent of European captives would not be classified as captives under the new directive. The regulations should be pro-portional to the risk and the quantitative capi-tal requirements will definitely have an impact. There may be a case for a lot of struc-tures in Europe to rethink their structures, their domiciles or both.”

Most Middle East states broadly follow the orig-inal EU Solvency I rules. For the GCC’s captive domiciles, the solvency regimes are broadly based on having a minimum capital equal to or greater than their base capital requirements. Regardless of the exact requirements, all three GCC domiciles offer more liberal regulatory terms than those implied by Solvency II.Given the presence of double taxation agree-ments and increasingly mature and sophisti-

“The Solvency II directive is making GCC domiciles an attractive location for EU captives”

party risk. For tax purposes, many European-domiciled captives reinsure risk with their parents’ main captive located in offshore domiciles. The new directive will require the European captives to effectively take no credit for the reinsurance. In the words of Marsh, under Solvency II the captive: “should be capitalised as if the purchased reinsurance assets did not exist.”

The second issue is catastrophe risk. Much of the capital requirement increase is based on captives being able to cover their parents’ catas-

03 Chapter.indd 28 16/11/2011 18:20


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cated regulatory regimes, it is not surprising that some currently EU-domiciled captives may be looking to relocate to jurisdictions that will not fall under the new regulations. While the majority will probably look first at geo-graphically closer non-EU European domiciles such as the Isle of Man and Guernsey, there is the possibility that some may consider relocat-ing to the GCC domiciles.

This may be particularly attractive for parent companies with commercial interests in the Middle East or Asia. Geographic location is an important factor in selecting a captive domicile and for those companies, having a captive cen-trally located between key business locations is an enticing prospect.

“We have had some enquiries from European captive owners following the introduction of the new Solvency II terms,” says Marsh’s Vellek-oop. “The treatment of captives under the direc-tive is still uncertain and some European cap-tive owners or prospective captive owners don’t like the new capital requirements. Some of them will consider Dubai and other GCC domi-ciles, although they can of course consider European jurisdictions that fall outside the EU.”

This is a view shared by Kane’s Brook. “The regulatory uncertainty that exists in other countries, particularly with the forthcoming implementation of Solvency II, is also serving to promote the advantages of domiciling a cap-tive in the Middle East,” he says. “The direc-tive is already having an impact on captive domiciles both inside and outside the EU, and parent companies are assessing the impact of the legislation on their captive strategy.

“It is expected that capital requirements for EU-domiciled captives will rise under the new sol-vency regime, while other captive domiciles outside the EU consider equal measures. At a time of regulatory upheaval, domiciles such as Dubai and Qatar offer stability and a solid cap-tive framework. Such domiciles will see an increase in interest as captive owners seek greater predictability over the amount of capital required and a reduction in operational costs.”

There are more than 550 captives in the EU, the majority of them in Ireland and Luxem-bourg. If even a small percentage changed domi-cile, many could relocate to the GCC. Negotia-tions over Solvency II are ongoing and the rule changes for captives may be relaxed. But the directive could have an impact on industry growth in the region over the coming decade. Necessity: Solvency II focuses on ensuring that a captive can cover its parent’s catastrophe risk

03 Chapter.indd 29 16/11/2011 18:17



the feeling is that there is still some way to go before these types of industry bodies are ready to jointly form a captive dedicated to insuring their risk. “If you look elsewhere in the world, [industry associations] forming a captive is the trend,” says Clyde & Co’s Hodg-ins. “But it’s not necessarily happening here, which I would put down to the level of com-petition within the marketplace. At the moment, the chances of two industry-related companies wanting to form an active captive are quite slim.”

History shows that a seismic shift is often required for this to change. It was the 1980s when a number of natural disasters drove oil and construction companies to form association captives, such as OIL.

“Because of the capital-intensive nature of these types of large construction and energy projects that these firms were involved in, there weren’t always the competitive insur-ance terms available in the commercial mar-ket,” says Vellekoop. “Industries just weren’t able to find the right price, the right capacity or the right terms and conditions and so cap-tives became the best option.”

Mutual associationsWhile the focus on captives has been on captive units set up by parent companies, the captive concept allows for a wider captive ownership. One group that could benefit from the establish-ment of a captive is mutual associations.

In other domiciles, it is not uncommon for groups such as professional pilots’, lawyers’ or doctors’ associations to form a mutual captive to write policies covering unique risks specific to their profession. For example, a captive can be set up by a pilots’ association to provide cover in the eventuality that a pilot loses his licence and therefore livelihood.

“You can have associations of surgeons and physicians, for instance,” says Vellekoop. “This industry has a significant exposure to medical malpractice. Often the insurance they can obtain wouldn’t cover the risks that they want covered or sometimes the price is not right. So what such an association can do is set up a mutual captive to ensure that the policy is tailored to their requirements.”

A PCC is an ideal structure for associations because it does not involve them having to go

through the process of incorporating their own captive, something which they may be ill-equipped to do. Since the running of the cap-tive is handled by the captive insurance man-ager and a single board at the core level, the amount of time and effort required to oversee the cell’s performance is far lower than a con-ventional captive.

The recently incorporated Global Star PCC, the case study for which can be found later in this report, is looking closely at attracting profes-sional associations to form cell captives.

Companies within a certain industry them-selves can form associations that set up a cell captive to deal with their specific insur-ance interests. Perhaps the best instance of this is the Bermuda-based OIL Insurance, a captive comprising 50 member oil companies insuring billions of dollars of their global energy assets.

Although industry-related associations in the region such as the Gulf Petrochemicals & Chemicals Association (GPCA) and the Middle East Business Aviation Association (MEBAA) are becoming more commonplace,

parent Overseas subsidiaries

Overseas subsidiaries


Local insurer

CAptive

reg

uLA

tOr

s

parent compensates subsidiary for loss

regulator insists on premium taxes or

declares policy illegal

diC/diL coverage

insura

nce po

licies

premiums

Wrap-around insurance coverage model

DIC/DIL=Differences in conditions/differences in limits. Source: MEED Insight

traditional modelUnder a traditional arrangement, the captive provides insurance cover to its parent and each of its overseas subsidiaries, either directly or through local insurers if required by the associated jurisdiction. DIC/DIL coverage is offered as part of a master policy with the parent to ensure consistency across the different policies.

03 Chapter.indd 30 16/11/2011 18:16


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While the same circumstances do not yet apply to the region, there have been a number of sig-nificant developments, such as the Dubai real-estate crisis and the cancellation of many projects. These could trigger industry-related firms to band together to create captives to cover specific types of shared risk.

Financial interest coverA type of coverage gaining momentum is financial interest cover. For multinational corporations with subsidiary firms in many countries, this type of insurance is gaining in popularity and insurance experts say that it is also an area in which regional and inter-national groups, looking to set up captives in the GCC domiciles, are increasingly expressing interest.

Traditionally, multinational companies would insure their global subsidiaries on a local basis, with policies governed by local legislation. While this provides adequate insurance cover-age for each subsidiary, it is not always consist-ent. To get around this, the group companies purchase ‘wrap-around’ coverage, which essentially supplements the local policies in each jurisdiction by covering the differences in conditions/differences in limits (DIC/DIL) between them.

But this approach is increasingly falling foul of regulators in each country, especially in juris-dictions where only local insurers and reinsur-ers can provide coverage, such as India. In the event of a claim being paid out to the local sub-sidiary under the DIC/DIL coverage, the regula-tors can claim that this is insurance being pro-vided by an unlicensed overseas insurer and/or that local premium taxes should apply to the claim. In effect, the DIC/DIL coverage is illegal.

In cases such as these, one of the best alterna-tive insurance solutions is financial interest

Financial interest cover model


CAptive parentOverseas

subsidiaries


Financial interest cover

parent can make tax-free payment to subsidiary or

retain claims payout

premiums

“The growth in Takaful insurance solutions has been major in the Muslim insurance world”

Financial interest cover modelUnder the financial interest cover model, only the parent is insured by the captive, with claims made if the overseas subsidiary makes a financial loss. The parent can choose what it wishes to do with the payout, but since the insurance contract was made only with the parent, there are fewer tax and insurance regulation implications.

Crisis: Developments like the Dubai real-estate crash can motivate firms to group together and form captives

03 Chapter.indd 31 16/11/2011 18:16



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cover. Here, the parent’s financial interest in its subsidiaries is covered under its own master policy, with any potential loss by a subsidiary calculated on the basis of the amount it would have received if it had been directly insured by the master policy.

Payment from any claim is made directly to the parent company which can choose to do what it wants with the funds, including repat-riating them directly to the subsidiary if it can find a tax-efficient and legal means of doing so. Because the financial interest cover is part of the master policy taken out by the parent, there are no compliance issues with local regulators.

“It’s an idea people are increasingly talking about, as it starts to filter through,” says Hodgins. “If you have a big multinational, the regulations and tax and legal position for each subsidiary can be complicated. Finan-cial interest cover potentially simplifies this to a degree.”

Financial interest cover may be of particular interest to groups that have local operating subsidiaries in different countries in the region, especially given the limitations on non-domestic insurance underwriting in certain states. As the region’s economy expands and companies look to enter new regional markets, the expectation is that this type of insurance solution may actu-ally take off.

Another area where financial interest cover could potentially be very attractive is for Indian group companies in the Gulf. Many of these firms have or are expanding operations in the subcontinent, as well as the GCC. In jurisdictions with so many conflicting insurance regulations and taxa-tion regimes, financial interest cover is a practical solution.

“Financial interest cover could be very attractive for Indian group firms in the Gulf”

e=Estimate. Source: Ernst & Young

GCC gross Takaful contributions

($m)

0

1000

2000

3000

4000

5000

20052006

20082007

2009e

5,000

4,000

3,000

2,000

1,000

0

Saudi arabia KuwaitUaE Qatar Bahrain

Insurance: Massive firms like Boeing have found it necessary to create a captive subsidiary

03 Chapter.indd 32 16/11/2011 18:16


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Takaful growthThe growth in Takaful or sharia-compliant insurance solutions has been a major facet of the insurance industry in the Muslim world over the past decade. Due to the restrictions on conventional insurance under Islam, the presence of Takaful solutions has been a major growth factor for the development of the insurance industry in the GCC.

According to data collected by Ernst & Young, gross Takaful contributions in the GCC grew by a CAGR of 45 per cent between 2005 and 2008, and by 31 per cent in 2009 alone. Saudi Arabia is by far the domi-nant market in the Takaful space in the region. Its high growth over recent years has been fuelled primarily by the introduction of compulsory medical insurance.

This trend is expected to continue into 2011, with the GCC forecast to grow by 31 per cent, according to Ernst & Young, with gross Takaful contributions from the GCC rising to $8.3bn.Having proved itself effective, the con-tinuing development and increasing popular-ity of sharia-compliant insurance solutions could act as a catalyst for the establishment of the region’s first self-Takaful.

“Captives are naturally compatible with the Takaful solution,” says Hodgins. “By its nature, Takaful, rather than being a risk transfer from a company to an insurer, is more of the company collecting together with other like-minded entities and pooling their risks. Those risks are then managed by a Takaful operator, which sounds just like a captive to me.

“To make a captive sharia-compliant is not terribly difficult. Yes, you will need a sharia board and it will involve some costs, but it would really depend upon the size of the business being put through the captive. How much time and resources are required depends on the availability of sharia profes-sionals. Sharia scholars tend to charge hourly rates, so it doesn’t need to be prohibi-tively expensive.

“I also think that most companies that would want to have a sharia-compliant captive would already have a sharia board, so again compli-ance may not be difficult. The only question there would be is if there are any conflicts of interest among the sharia board members. Such issues can readily be resolved with careful structuring.”

e=Estimate. Source: Ernst & Young

Takaful contributions by business

(%)

0.0

0.2

0.4

0.6

0.8

1.0

20082007

2009e

100

80

60

40

20

0

Motor Marine and aviationproperty and accident Family and medical

e=Estimate; f=Forecast. Source: Ernst & Young

GCC gross Takaful contributions forecast

($m)

0

2000

4000

6000

8000

10000

2009201

0e201

1f

10,000

8,000

6,000

4,000

2,000

0

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*Based on listed companies and firms that have released such information only. Sources: MEED Insight; Zawya

Number of GCC-based companies based on annual revenues*

0

30

60

90

120

150

˃˃>$10

,000m

˃>˃$1,000m

˃˃>$5,000m

˃>˃$500m

150

120

90

60

30

0

GCC firms with annual revenues exceeding $500m by sector*

Financial services

13

5

2

9

4

2

%Oil and gas

Telecommunications

Consumer goodsLeisure and tourism

Real estate

Transport

Industry

Retail

19

6

3

1

51

9

4

1

Values


Construction

Food and beveragesPower and water

Mining and metals

Services

It is impossible to precisely quantify the poten-tial for captive insurance take-up in the region. Globally, captives tend to be set up by the larg-est companies, which have the most potential savings and efficiencies to be made from them. It is no surprise that the first two captives in the Gulf were Saudi Aramco, probably the world’s most valuable firm, and Sabic, the largest listed company in the region.

Indeed, the region’s captive insurance special-ists confirm that of all the companies in the region likely to establish captives, the largest firms are expected to lead the way.

Based on this assumption, it is possible to identify a general pool of firms that could potentially benefit from the establishment of a captive subsidiary based on their size and likely insurance and premium requirements. An obvious means of doing this is to measure companies by revenue using publicly available information on listed companies and from pri-vate companies which choose to publicise their earnings.

In terms of companies with annual revenues of more than $10bn, there are just three listed companies: Sabic, Saudi Telecom Company and Petro-Rabigh, the petrochemicals pro-ducer. To that list, it is safe to add the region’s national companies, among them Aramco, Kuwait Petroleum Corporation and its subsidi-aries, QP, Adnoc and its subsidiaries, and Petroleum Development Oman.

The list of companies with revenues in excess of $5bn is slightly larger with the addition of telecoms firms Etisalat and Qatar Telecom, financial institutions Al-Rajhi Bank and Kuwait Finance House, and half a dozen other listed firms. When the threshold is lowered to companies with more than $1bn in annual turnover, there is a big leap to more than 80 companies. This increases to more than 140 companies when the revenue figure is reduced to $500m.

Quantifying the GCC’s captive market potential

04 Chapter.indd 34 17/11/2011 09:42

www.meed.com QFCA | 35

13

5

2

9

4

2

19

6

3

1

51

9

4

1


Number of GCC companies based on number of staff employed*

0

50

100

150

200

250

300

˃>25,000

˃>10,000

˃>15,000

>5,000

300

250

200

150

100

50

0

Breakdown of GCC companies with more than 5,000 employees*

Construction

26

14

7

3

1

17

10

5

1

1

%IndustryTransport

Real estate

AgricultureTelecommunications

Consumer goods

Food and beverages

Retail

Services

Financial services

30

14

7

4

121

14

9

5

Values


Leisure and tourismOil and gas

Healthcare

Information technology

ConglomeratesMining and metals

Power and utilities

comfortable detailing their number of staff than they are with disclosing their financials.

In the GCC, there are more than two dozen regional firms with more than 25,000 employ-ees. The bulk of these are contractors such as the Saudi Binladin Group and Arabtec, which is unsurprising given the large number of labourers they require.

“Whether or not having a captive makes sense depends on the needs of the firm”

Of these companies, close to 40 per cent are banks or other financial institutions. Oil and gas firms comprise 15 per cent, while telecoms companies form 10 per cent of the total.

Another way of assessing the potential market is to measure companies by the number of employees. This provides a greater pool of firms because private companies are more

When companies with more than 5,000 employees are taken into account, the number of companies increases to about 300. Given construction firms’ labour require-ments, it is again not surprising to see that the construction sector comprises nearly half of all companies with more than 5,000 employees. Two other labour-intensive sectors, industry and transport, are a distant second and third, with 10 and 9 per cent respectively.

However, while it is possible to quantify the number of large companies in the region likely to have premium levels to make cap-tive insurance an option, this does not tell the whole story. For example, both Tabreed and Saudi Readymix, two of the companies with captives in the region, do not have revenues in excess of $500m or more than 5,000 employees.

This again underlines that while company size is an indication, whether or not having a captive makes sense depends on the needs of the company, its risk profile, and the sophisti-cation of its insurance strategy.

Take-up: The region’s big corporations will lead the way

04 Chapter.indd 35 17/11/2011 09:42


The captive insurance concept is gradually gaining traction in the region, but all

involved admit there is still some way for it to go before becoming widely accepted in the region. When this may happen is unclear, but there is a growing convergence of factors already outlined in this report, which are pointing towards the development of a critical mass in the region.

“When you look at the GCC, risk management has only recently become a board-level topic of discussion,” says QFC’s Randeva. “There is now a confluence of factors that have come to a head in the last five to six years, which should have some positive impact on the take-up of captives. But what we are not seeing are the right fundamentals in the market just yet to accelerate this process. Pricing is a factor, with many companies saying they would set up a captive when premiums rise.

“As we have seen, there are reasons to believe that there is a rising trend of premium increases in the region, which will over time compel companies to look more seriously at mitigating their risks cost. The market will also enter an up cycle and that in turn will also have an upward effect on premium levels. Similarly, there is a feeling that Solvency II may drive some EU-domiciled captives into other jurisdictions, with some perhaps looking at re-domiciling to the GCC as a result. How-ever, much will depend on just how much of the Solvency II directive will itself be incorpo-rated by the region’s regulators.

There are other reasons to be hopeful. The for-mation of the first open PCC in the region paves the way for new opportunities previously una-vailable, while the ongoing awareness and edu-cational work done by the likes of Marsh, Kane and Ensurion will eventually bear fruit.

“There is already a heightened interest in the captive option with a number of major compa-nies in the region,” says Kane’s Brook. “How-

ever, the financial crisis, while having a much reduced impact in the Middle East in compari-son to many Western countries, did see self-insurance projects stalled. Now that the eco-nomic clouds have dispersed to an extent, these projects are coming back onto the table.

“It is also important to acknowledge that while the region now has domiciles offering captive legislation, this is still a work in progress. While the building blocks are in place, they are still being refined, as jurisdictions such as ph

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Qatar and Dubai seek to create a captive envi-ronment with a strong regulatory capability, which is efficient, cost-effective and conducive to growth in this competitive marketplace.”

This view is echoed by Dewey & LeBoeuf’s Belcher. “Captives can be versatile structures and the emerging regulations are encouraging this,” he says. “I foresee growth in the use of captives amongst the conglomerates that are common in the region, groups of businesses in the same industry, as well as unrelated users, for example rent-a-captives. A further possibil-ity is whether captives will be developed for use in a sharia-compliant manner.”

As more companies embrace captives, there is the very real expectation that the region will become as much a captive hub as the other main domicile groupings the world over.

What the market needs probably is a critical mass of companies adopting the captive sub-sidiary. The region is very much one of trends, but trends, initially at least, take some time to pick up pace.

“Pricing is a factor. Many firms say they will set up a captive when premiums rise”

Prognosis

Domicile: Qatar seeks to create a captive environment with a strong regulatory capability

05 Chapter.indd 36 17/11/2011 09:47

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One of the most interesting and innovative developments in the regional captive

insurance industry has been the establishment in 2011 of Dubai International Financial Cen-tre-domiciled Global Star PCC, the first open Protected Cell Company (PCC) in the GCC, offering captive insurance cells to any client showing a credible business case.

The PCC is the brainchild of Ruan Janse van Rensburg, a Bahrain-based actuary who saw a gap in the market for companies and associa-tions that wanted the benefits of a captive sub-sidiary, but without necessarily the costs, expertise and administrative time that manag-ing a captive requires. Janse van Rensburg, who is the sole core shareholder in the PCC with a paid-up core share capital of $300,000, worked with Marsh’s Vellekoop over a period of almost two years on formulating its propo-sition and feasibility.

“We saw an opportunity in the market for a PCC like Global Star,” says Vellekoop, who acts as the PCC’s insurance manager and is one of its directors. “There are many smaller organi-sations that can benefit from a captive solution, but which don’t come with the same operating expenses as a normal captive insurance com-pany for example. I like to compare a PCC with an apartment building. The core-shareholder is the landlord; the cell-owners are the tenants; the captive manager [like Marsh] is the prop-erty manager.”

A PCC is a way to gain quick access to a captive insurance solution, without the sometimes time-consuming process involved in setting up a new company. A PCC is a single company whereby the articles of association are altered to create a core and an indefinite number of cells, which are kept separate from each other. Each cell has assets and liabilities attributed to it, and its assets cannot be used to meet the liabilities of any other cell, hence ‘Protected Cell’. The com-pany will also have non-cellular (or core) assets, which will be used to meet liabilities that can-

not be attributed to a particular cell. A PCC can create and issue ‘cell-shares’ in respect of any cell, but the entire company is managed by a single independent board appointed by the core-shareholder.

The core-shareholder has the voting rights and therefore appoints the independent direc- ph

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tors of the PCC. The cell-shareholder(s) have the dividend rights in respect of their cell and are therefore entitled to the profits made by the cell.

“Basically, a protected cell of a PCC can be used as a captive insurance vehicle, with the ‘cell-shares’ held by the respective cell-owner, who participates within the PCC structure,” says Vellekoop. “A PCC is therefore a platform com-pany enabling clients wishing to utilise a cap-tive insurance vehicle for self-insurance pur-poses, without incurring the operating expenses of a normal captive insurance company.”

One way of operating would be for a PCC spon-sor, such as Janse van Rensburg, to establish a PCC and to have it authorised by the relevant insurance regulator as an insurer. A cell, oper-ating as a captive insurance vehicle, or special purpose vehicle, could then be offered to quali-fying prospective cell-owners that want one for

Global Star case study

Comparison: Vellekoop likens a PCC to an apartment building with a landlord, tenants and property manager

“The core-share-holder has the voting rights and appoints the inde-pendent directors”

06 Chapter.indd 37 17/11/2011 09:46


Cell captive: An association of surgeons could benefit

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view, that is not desired. Naturally, the inde-pendent PCC board will honour nearly every request from the cell-owner provided it meets all legal and regulatory requirements.”

In the DIFC, PCCs can only be used for cap-tive insurance solutions and umbrella funds as specified in the regulatory rulebook. A cell can be licensed for the life insurance classes. Janse van Rensburg and Vellekoop are investi-gating whether Global Star could offer corpo-rate pension solutions as an off-balance alter-native to the end-of-service gratuity, thereby safe-guarding these funds for employees. “We haven’t tested these ideas yet, but because we are so young we definitely want to explore the options potentially open to us,” says Janse van Rensburg.

Global Star is still at a nascent stage, but the omens are already promising, with a number of organisations and associations having already approached Global Star about forming a cell. The flexibility cells offer means that the PCC’s promoters have a number of different avenues they can explore, although in the case of captive cells, potential cell owners will still need to have certain annual minimum premium levels to make them cost effective. In addition to the minimum capital requirements, firms should also consider the various management and licensing fees that operating a cell entails.

Once the decision is made, it is only a matter of weeks to establish a cell within a PCC, unlike the six to eight months it can take to create the PCC itself or a traditional captive insurance company. This short timeframe is another key attraction of a cell captive. The PCC simply has to provide the regulator with a cell business plan and ensure enough funds are available to meet the regulatory capital requirements.

Vellekoop is optimistic about Global Star PCC’s potential. The key issue remains the lack of awareness of the captive insurance concept in the region, which both he and Janse van Rens-burg are doing their best to overcome. Nobody is expecting quick results, but with the number of permitted cells unlimited and an increasingly receptive market, all the ingredients are there for the PCC to be a success. “We have to be opti-mistic,” says Vellekoop. “But you have to give us around four years to create awareness and comfort among clients. Awareness of this con-cept is important of course, but we also want and need to make sure the concept makes sense for our clients. If it doesn’t, we are not going to push it for the sake of it.”

“Global Star is still at a nas-cent stage, but the omens are already promising”

association of airline pilots can insure them-selves against loss of their aviation licence fol-lowing permanent disability; and an association of surgeons or physicians can insure themselves against their medical malpractice exposure.

Ultimately, a captive insurance vehicle is a risk management tool and risk financing mecha-nism that can provide numerous advantages over a commercial insurance programme, pro-vided the risks are managed properly.

However, cell captives can also have their dis-advantages as opposed to a normal captive insurance company that their cell-owners need to consider. The primary issue is the perceived lack of control the cell-owner has over its own cell. The core-shareholder has the voting rights and appoints a single independent board of directors and is duty bound to act in the best interest of the PCC in its entirety. The cell-own-ers cannot appoint directors to the single board of the company. This perceived lack of control by the cell-owners is sometimes seen as a dis-advantage for participation in a PCC.

“Individual cell owners cannot appoint their own directors to the PCC board, otherwise the directors from two competing organisations would be able to ‘look’ into each other’s cells,” says Vellekoop. “From a competitive point of

self-insurance purposes, without the need to set up a new captive insurance company, appoint directors, auditors and other profes-sional service providers. The authorised finan-cial services firm will be the PCC and the crea-tion by the PCC of a new cell does not create, in respect of that cell, a new legal entity. The cells do not have separate legal existence, but are a segmental part of the PCC.

Each cell will be able to carry out and effect contracts of insurance, purchase reinsurance, receive insurance premiums and pay claims from its own bank account.

“So, if you are an organisation whereby the insurance premium spend is significantly higher than the claims incurred over the past few years, you are possibly subsidising your commercial insurer for claims suffered else-where in its portfolio, essentially subsidising other policyholders’ losses,” says Janse van Rensburg. “If you are not happy with this, you could consider the captive insurance solution.”

Company insurance or reinsurance solutions are clearly the most obvious purposes for establishing a cell within the PCC, with the assets and liabilities of each cell-owner ring-fenced and protected from all other cells. Firms can establish a cell captive within a PCC for a regulatory minimum base capital of $50,000 (although ultimately the regulatory capital requirement will most likely be higher than the minimum capital requirement dependent on the additional application of the solvency and/or risk-based capital requirement proposed by the regulator) and considerably less licensing and administrative costs than a standalone captive. At the same time, because an independent board of directors sits at the core level and manages the cell directly, there is less management time and expertise required to run the cell efficiently.

While creating self-insurance programmes may well be the obvious targets for setting up cells, Vellekoop and Janse van Rensburg are also investigating a number of other areas. One of these is association-owned captive cells to be used as a savings and protection vehicle offering any combination of insurance, such as life, disability, medical and unemployment.

A cell captive can be utilised by commercial, industrial and not-for-profit organisations and associations. For example: an association of accountants or lawyers can create a cell and pool their professional indemnity exposure; an


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home. Besides this, the ability to conclude par-ticipation on competitive terms and prices oth-erwise declined by the open market that would have pushed the project to increase premium spend was also viewed as a positive factor.

Corney adds: “We are trying to lead by exam-ple, which fits in very nicely with one of Mubadala’s key objectives, which is to acceler-ate the development and diversification of Abu Dhabi’s economy.”

“From Mubadala’s strategic perspective, it’s giving us the discipline to better identify, understand and manage our risks,” says Mahra Rashed al-Suwaidi, treasury manager at Mubadala. “At MDC (RE), we never initiate actions that would be to the detriment of the project. The project’s interest is primary before the captive’s monetary benefit.

“Positioning itself as a pioneer with regards to captives is a critical aspect of MDC (RE) Insur-ance. In the region as a whole, there is a general lack of understanding behind the mechanics of the insurance industry, with most companies happy to go along with the status quo of using local brokers or insurers to obtain and accept quotes for their insurance needs. Because this approach does not always ideally meet the requirements of regional companies, both from a risk coverage and commercial perspective, Mubadala is keen to act as a catalyst for other firms to follow in its footsteps.”

Likewise, the company did at one point con-sider obtaining a conventional insurance licence, but soon realised this was not in the best interests of the local economy. “There was a discussion on the merits and demerits of our pursuing an insurance licence as opposed to a captive, but the last thing we wanted to do was to start becoming a direct competitor to the local insurance community,” says Corney.

For much the same reason, selecting the DIFC as the captive domicile was an obvious choice.

As one of the key planks of the Abu Dhabi economy, the adoption of a captive insur-

ance subsidiary by Mubadala Development Company (MDC) is a significant development in the evolution of the insurance industry in the region. MDC (RE) Insurance, the first ‘cap-tive’ out of Abu Dhabi, was incorporated in February 2010 at the DIFC with an authorised share capital of $25m and a paid-up share capital of $2m.

The catalyst for MDC (RE) Insurance’s formation was the arrival of Matthew Hurn, executive director of Group Treasury at Mubadala. Hurn had experience of operating a captive insurer effectively in his previous role as group treas-urer of the Dixons Group and he saw the oppor-tunity and potential advantages for Mubadala to set up its own captive insurance subsidiary.

“When Hurn came in, he basically challenged us to look at the feasibility of setting up a cap-tive for Mubadala,” says Alan Corney, head of group insurance at the company. “So we engaged Marsh to carry out a feasibility study that basically looked over our portfolio, our potential growth and development and see where a captive might fit and what kind of ben-efits it might bring or not, as the case may be. We then decided to take it to the next step of incorporating the captive and since then have never looked back.”

Prior to the adoption of the captive, Mubadala and its various divisions tended to arrange their own insurance with no centralised approach. Corney explains that a natural con-sequence was that Mubadala may not have necessarily been getting the best value out of its premium payments. Similarly, there were var-ying standards of risk retention and variable qualities of wordings in their insurance poli-cies. For an investment and development com-pany such as Mubadala that wanted to bench-mark itself against its international peers, there were clear, potential synergies that could be gained from a captive by consolidating pro-

grammes, leveraging relationships with insur-ers and extending potential benefits to the group’s different subsidiaries.

In many ways, the biggest challenge during the initial process was the internal selling to Mubadala’s management of the captive con-cept and the advantages that it would bring. Because the captive would not be hugely prof-itable – in the short term at least – it was nec-essary to create a convincing argument that the captive could bring other, less tangible, advantages to Mubadala, such as gaining a better understanding of its overall insurance risk profile and creating a more robust inter-nal discipline with regards to the group’s insurance strategy.

It was ultimately the realisation of key benefits that a captive insurer would bring to Mubadala that led to the establishment of the entity. For example, the project brokers should be able to capitalise on the reduced open market risk share, whereby only a lower percentage would be available for reinsurers, which in turn should stimulate increased competition while helping to drive the most competitive deal

Mubadala case study

Abu Dhabi: The captive is a pioneer in the region

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risks? But ultimately Mubadala is a big com-pany and we like to think that we understand our risks better than others. And if you have the assignment process perfected you get the security you want.”

The absence of a rating also poses challenges for insuring joint venture partners’ risks. Mubadala writes a percentage of risk up to the equivalent percentage shareholding, even though the company has the ability to write a higher percentage. This is a consideration for the project and its shareholders. Like lenders, partners may be hesitant about the rating absence, but in many cases, they themselves have their own captive capabilities which they do not want eaten into by another captive.

Looking forward, the ultimate goal for MDC (RE) Insurance is to start retaining some levels of risk. The next stage of its evolution will be to start analysing the potential tax benefits gained from the captive, something which the com-pany has not done until now.

In parallel, not content to sit back and allow its captive manager and captive broker, Marsh and Miller International, to do all the work, it is engaging directly with the market, regula-tors and brokers to build relationships and gain a better understanding. It clearly wants to be in a position where it can dictate how it wishes to proceed rather than relying on oth-ers to advise it.

Corney makes it clear that forming a captive is not a straightforward proposition and some-thing companies need to consider carefully. “Have a very good, comprehensive feasibility study conducted,” he advises. “There is a dan-ger because ‘captive’ can become a buzz word, but having a captive doesn’t always make good, sensible, strategic sense. For Mubadala, when you have got anything from aerospace to heavy industries to energy to hospitals, to try and get the commonality of premium spend is tricky. This is where a good, detailed feasibility study comes in to assess the risk profile of any entity. That said, our captive has already proved its worth and looking back we wouldn’t have done anything differently.”

True to Mubadala’s pioneering position in the Abu Dhabi economy and with MDC (RE) Insur-ance now firmly up and running, it is likely only a matter of time before other local compa-nies follow in its footsteps. If captive insurance is to take off in the region, much will be owed to Mubadala’s successful efforts in this sector.

ing that we want the captive involved, lenders logically look at the facility agreement and say ‘Where’s your rating or give us some financials, give us some comfort?’.

“This has probably been one of the biggest chal-lenges. Aside from lender requirements, you also then have joint venture partners and at the project level – the actual project management teams – who quite rightly want to have mini-mum levels of security. So the way we have worked up till now to give that added layer of comfort is to explain, firstly, that it is 100 per cent pass through of risk at this time and, sec-ondly, we will only use S&P A or better rated security. Thirdly, we agree to sign our reinsur-ance security on an as-and-when-required basis. This is the way we have navigated around in terms of lenders where it just creates that one extra layer of assignments and in turn gives them access effectively to A- security.

“It is very easy to talk about this, but it’s another thing to explain the innovative assign-ment process associated with MDC (RE)’s rein-surance security to multiple parties, especially in this kind of banking environment. And in today’s climate, which is all the more challeng-ing, why would we want to take in any kind of

As part of the feasibility process, Mubadala scored nine domiciles rating them against 27 criteria, which extended to include capitali-sation, regulatory structure and solvency mar-gins among others.

With the DIFC’s geographical proximity, it was easier to have a transparent relationship with the authority, which led to the successful com-pletion of MDC (RE)’s first risk assessment process within its first year of incorporation without a risk mitigation plan.

With the captive now firmly established, the Mubadala insurance team is focused on devel-oping MDE (RE) Insurance into a more sophis-ticated insurance and reinsurance vehicle. Currently the captive acts solely as a reinsurer, taking ceded risk from local insurers in the countries where its various projects and sub-sidiaries operate. “We speak to all of our ven-tures out there to understand how they are pro-curing their insurance, what they are procuring as insurance and to see if there is a natural fit for the Mubadala captive insurer to partici-pate,” says Corney. “We have covered a lot of our projects, and so we are participating in the majority of our Mubadala investments now as a reinsurer.”

Having the captive itself allows Mubadala to access the wider, global reinsurance market, particularly in Asia, which Mubadala has found to be especially supportive and recep-tive to the captive’s requirements. In some cases, particularly in energy-related insurance, it also deals with the more traditional Euro-pean and US reinsurers. Mubadala is building long-term preferred relationships with the insurance and reinsurance market regionally and internationally.

Currently the captive is focused on reinsuring energy, construction and operational property/business interruption-related risks around the development and operation of many of Mubadala’s projects. In some cases, it also takes one-off terrorism policies for its interna-tional projects.

The biggest challenge facing the Mubadala captive around project-related risks, particu-larly for PPP projects requiring project finance, is a lack of a rating for the captive. “In any international finance project there are mini-mum rating criteria for the security,” explains Al-Suwaidi. “So on financed projects, specifi-cally internationally financed projects, where we were knocking at a project’s door and say-

Alan Corney: Head of group insurance at Mubadala

“The ultimate goal for MDC (RE) Insurance is to start retaining some levels of risk”


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QFC Authority Captive Insurance Roadshow Abu Dhabi, UAE – 8 December 2011 – Intercontinental Hotel, Abu Dhabi

Riyadh, KSA – 29 January 2012 – Venue to be confi rmed

The roadshow will travel across the GCC region in 2012 For a full list of upcoming dates and locations, or to register interest, please contact

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