Keynote Address by Mr. Danial Mah Abdullah, Director General of Labuan FSA, at the Conference on Adding Confidence To Captives: Managing Volatility via Self Insurance
ADDING CONFIDENCE TO CAPTIVES : MANAGING VOLATILITY Via SELF INSURANCE
09 August 2019, Kuala Lumpur
Distinguished speakers and delegates,
Ladies and Gentlemen,
Assalamua’laikum warahmatullahi wabarakatuh and good morning.
1. It is my pleasure to be here, amongst insurance professionals and captive practitioners, hailing from different markets and jurisdictions. I bid you a warm welcome to today’s conference themed “Managing Volatility via Self Insurance”. I am confident that this forum will be an engaging session for everyone.
2. The global and regional business landscape continue to shift and evolve, bringing about new dynamics in uncertainties and external complexities. Notwithstanding this, these challenges also bring along with them a set of opportunities and risk management businesses that institutions can take advantage of, including the use of mitigating risk management tools and structures such as captives.
3. Indeed, the forum today will provide a good platform for us to exchange ideas on how captives can be further leveraged on as an effective self-insurance mechanism that is professionally managed. During this conference, you will hear from the experts on their experience of how captive can be deployed as a cost efficient and effective tool to manage business risk in the international business landscape and hopefully we all can learn and use the know-how in our areas of work or business.
Ladies and Gentlemen,
4. As you are aware, captives have been around for a long time and widely accepted in the American and European regions. The concept behind captive formation remained relatively unchanged, that is to be a risk mitigation tool and to address the difficulty in obtaining certain insurance covers in the commercial market. In the past, captives have been more perceived as a tax avoidance tool, marring and affecting its true purpose as a risk mitigation tool. However, this perception has changed over the years to be more receptive and viewed positively by both the markets and regulators. Today, captives have gained widespread traction around the world including by international standard setting bodies. Asia, in particular, has shown tremendous growth spurt of captives over recent years. AM Best’s Captive Market Report July 2019 quoted a Marsh research that mentioned an expansion of 24% in the number of its captives, and an increment by 116% of gross premiums over the last five years in the Asian market.
5. The growth in the use of captives is also seen across a wider variety of industries and corporates. Not only large conglomerates own captives but increasingly, medium-sized companies have also leveraged on captive in seeking new ways to manage their risks. This is particularly true for businesses expanding internationally and engaging in activities with corresponding uncertainties relating to risk events.
6. This is where a captive comes across as a good risk management solution as it can be customised to suit a company’s needs. A captive owner can structure its insurance needs based on its own risk retention appetite while having access to the reinsurance markets.
Ladies and Gentlemen,
7. While captives are formed mainly to provide risk management to an umbrella group of related-companies, there is an increasing trend for captive professionals offering their risk management services to underwrite risks of third parties. The 2019 Captive Landscape Report quoted that 3rd party risk business has grown by 12% year-on-year and 62% over the last five years. However, while the underwriting income generated from third-party business may have enhanced a captive’s value by expanding beyond its intra-group use and be utilised for 3rd party risks without the need for large capital outlay, there is need for a proportionate enhancement in regulatory and governance oversight over such activities. This is necessary as such activities are akin to normal reinsurance businesses.
8. At present, there are more than 7,000 captives worldwide. Not only the number of captives is increasing but also the captive structure is adopting and changing in line with market needs and technological advancements for example, technology innovation such as blockchains are new business trends whose corresponding loss exposures are not yet well understood, and protection cover from traditional commercial insurance may be limited or non-existent. Therefore, such unique risks can be tailored and underwritten through the use of captive structures.
9. Indeed, there is an increasing number of captives being used to cover cyber risks. According to the Marsh Captive Report 2019, the number of captives writing cyber liability coverage increased by 95% over the past five years. Jurisdiction like Bermuda wrote US$42 million of cyber risk premiums in 2017, more than double of that of, US$15.7 million in 2016. This is a great potential area of business for captives to be used for organisations’ cyber risk strategies.
Ladies and Gentlemen,
10. Let me now share the latest on captives in Labuan IBFC. Captive is an important business segment in Labuan IBFC, being the 2nd highest contribution to the total insurance industry premiums in 2018. As of June 2019, there are 51 captives (including PCCs) operating out of Labuan IBFC. This is on the back of a solid growth in 2018, with four new captives being approved in the first half 2019. In term of gross written premiums, Labuan captive insurance business increased by 12.8% to $288 million in June 2019, compared with $255 million of the same period in 2018. Most of the premiums are of Asian origins, particularly from Indonesia and Japan.
11. The steady growth momentum of Labuan captives particularly from the Asian region, can be attributed to the growing awareness about the benefits of captives. This has heightened the interests from both multinational companies and medium-sized companies looking for more flexibility in managing their risks and understanding the use of special underwriting vehicles such as captives for their risk management solutions. In addition, the changes in the international tax landscape has somewhat prompted companies to look for alternative jurisdictions to re-domicile their existing captives. The tax changes include more stringent tax transparency and having substantive presence in domiciles in which they operate. In this regard, it is only natural for Asian companies to opt for a captive domicile closer to their home markets and Labuan IBFC is well-suited for this. Being in the same time zone with other major cities in the region such as Hong Kong, Singapore, Shanghai, business in Labuan IBFC can be transacted more conveniently than if they are done outside of Asia. Labuan captives have the added advantage of being able to establish offices anywhere outside of Labuan, provided its core substance requirements is met in Labuan.
12. Effective 1 January 2019, the Labuan tax framework had been revised to include the need for Labuan entities to have substance in Labuan in the form of full time employees and operating expenditure to be spent in Labuan island. This is part of Labuan IBFC's commitment to comply to international standards and requirements such as those of the OECD's. Having said this, all other financial centres are also required to institute substance requirements for business outfits. Labuan is not unique in introducing these requirements. However, we believe that the prospects for captive business will as owners look for a substance-enabling and credible jurisdiction to establish their captives.
13. From another perspective, for risk owners who prefer captives to be governed by Shariah principles, Labuan IBFC offers Shariah-compliant alternatives via takaful captives. In fact, Labuan was the first jurisdiction in the region to offer Shariah-compliant captive vehicles for risk owners opting for takaful underwriting approach. Labuan IBFC is indeed an ideal jurisdiction for the captive market with its business-friendly legal framework and wide range of captive structures, supported by a ready pool of reinsurers making up Labuan IBFC’s insurance industry ecosystem.
14. Labuan IBFC will continue to preserve its competitiveness and maintain its international profile through its adherence to high standards of integrity, transparency and compliance. We will continue to facilitate business development, ease the conducting of business and support market innovation, including captive business to grow the Centre.
Ladies and Gentlemen,
15. Before I conclude, I would like to take the opportunity to thank Swiss Re and Labuan IBFC for organising this event, managing volatility via self insurance. I am sure the conference will generate ideas and more awareness on how captive structures can be leveraged on and used as part of self-insurance scheme. Along the discussion, I hope that there will also be greater awareness on what Labuan captives can offer for you and how Labuan IBFC can be your captive domicile of choice for Asia.
16. Lastly, I would like to take this opportunity to invite you all to visit Labuan, especially those who have not been to the island. I can assure you this place is not like Kuala Lumpur. In Labuan, you will certainly more fresh air and clear skies, but more importantly, it’s a centre for you to establish a captive to do your self-insurance.
Thank you.
Ladies and Gentlemen,
Assalamua’laikum warahmatullahi wabarakatuh and good morning.
1. It is my pleasure to be here, amongst insurance professionals and captive practitioners, hailing from different markets and jurisdictions. I bid you a warm welcome to today’s conference themed “Managing Volatility via Self Insurance”. I am confident that this forum will be an engaging session for everyone.
2. The global and regional business landscape continue to shift and evolve, bringing about new dynamics in uncertainties and external complexities. Notwithstanding this, these challenges also bring along with them a set of opportunities and risk management businesses that institutions can take advantage of, including the use of mitigating risk management tools and structures such as captives.
3. Indeed, the forum today will provide a good platform for us to exchange ideas on how captives can be further leveraged on as an effective self-insurance mechanism that is professionally managed. During this conference, you will hear from the experts on their experience of how captive can be deployed as a cost efficient and effective tool to manage business risk in the international business landscape and hopefully we all can learn and use the know-how in our areas of work or business.
Ladies and Gentlemen,
4. As you are aware, captives have been around for a long time and widely accepted in the American and European regions. The concept behind captive formation remained relatively unchanged, that is to be a risk mitigation tool and to address the difficulty in obtaining certain insurance covers in the commercial market. In the past, captives have been more perceived as a tax avoidance tool, marring and affecting its true purpose as a risk mitigation tool. However, this perception has changed over the years to be more receptive and viewed positively by both the markets and regulators. Today, captives have gained widespread traction around the world including by international standard setting bodies. Asia, in particular, has shown tremendous growth spurt of captives over recent years. AM Best’s Captive Market Report July 2019 quoted a Marsh research that mentioned an expansion of 24% in the number of its captives, and an increment by 116% of gross premiums over the last five years in the Asian market.
5. The growth in the use of captives is also seen across a wider variety of industries and corporates. Not only large conglomerates own captives but increasingly, medium-sized companies have also leveraged on captive in seeking new ways to manage their risks. This is particularly true for businesses expanding internationally and engaging in activities with corresponding uncertainties relating to risk events.
6. This is where a captive comes across as a good risk management solution as it can be customised to suit a company’s needs. A captive owner can structure its insurance needs based on its own risk retention appetite while having access to the reinsurance markets.
Ladies and Gentlemen,
7. While captives are formed mainly to provide risk management to an umbrella group of related-companies, there is an increasing trend for captive professionals offering their risk management services to underwrite risks of third parties. The 2019 Captive Landscape Report quoted that 3rd party risk business has grown by 12% year-on-year and 62% over the last five years. However, while the underwriting income generated from third-party business may have enhanced a captive’s value by expanding beyond its intra-group use and be utilised for 3rd party risks without the need for large capital outlay, there is need for a proportionate enhancement in regulatory and governance oversight over such activities. This is necessary as such activities are akin to normal reinsurance businesses.
8. At present, there are more than 7,000 captives worldwide. Not only the number of captives is increasing but also the captive structure is adopting and changing in line with market needs and technological advancements for example, technology innovation such as blockchains are new business trends whose corresponding loss exposures are not yet well understood, and protection cover from traditional commercial insurance may be limited or non-existent. Therefore, such unique risks can be tailored and underwritten through the use of captive structures.
9. Indeed, there is an increasing number of captives being used to cover cyber risks. According to the Marsh Captive Report 2019, the number of captives writing cyber liability coverage increased by 95% over the past five years. Jurisdiction like Bermuda wrote US$42 million of cyber risk premiums in 2017, more than double of that of, US$15.7 million in 2016. This is a great potential area of business for captives to be used for organisations’ cyber risk strategies.
Ladies and Gentlemen,
10. Let me now share the latest on captives in Labuan IBFC. Captive is an important business segment in Labuan IBFC, being the 2nd highest contribution to the total insurance industry premiums in 2018. As of June 2019, there are 51 captives (including PCCs) operating out of Labuan IBFC. This is on the back of a solid growth in 2018, with four new captives being approved in the first half 2019. In term of gross written premiums, Labuan captive insurance business increased by 12.8% to $288 million in June 2019, compared with $255 million of the same period in 2018. Most of the premiums are of Asian origins, particularly from Indonesia and Japan.
11. The steady growth momentum of Labuan captives particularly from the Asian region, can be attributed to the growing awareness about the benefits of captives. This has heightened the interests from both multinational companies and medium-sized companies looking for more flexibility in managing their risks and understanding the use of special underwriting vehicles such as captives for their risk management solutions. In addition, the changes in the international tax landscape has somewhat prompted companies to look for alternative jurisdictions to re-domicile their existing captives. The tax changes include more stringent tax transparency and having substantive presence in domiciles in which they operate. In this regard, it is only natural for Asian companies to opt for a captive domicile closer to their home markets and Labuan IBFC is well-suited for this. Being in the same time zone with other major cities in the region such as Hong Kong, Singapore, Shanghai, business in Labuan IBFC can be transacted more conveniently than if they are done outside of Asia. Labuan captives have the added advantage of being able to establish offices anywhere outside of Labuan, provided its core substance requirements is met in Labuan.
12. Effective 1 January 2019, the Labuan tax framework had been revised to include the need for Labuan entities to have substance in Labuan in the form of full time employees and operating expenditure to be spent in Labuan island. This is part of Labuan IBFC's commitment to comply to international standards and requirements such as those of the OECD's. Having said this, all other financial centres are also required to institute substance requirements for business outfits. Labuan is not unique in introducing these requirements. However, we believe that the prospects for captive business will as owners look for a substance-enabling and credible jurisdiction to establish their captives.
13. From another perspective, for risk owners who prefer captives to be governed by Shariah principles, Labuan IBFC offers Shariah-compliant alternatives via takaful captives. In fact, Labuan was the first jurisdiction in the region to offer Shariah-compliant captive vehicles for risk owners opting for takaful underwriting approach. Labuan IBFC is indeed an ideal jurisdiction for the captive market with its business-friendly legal framework and wide range of captive structures, supported by a ready pool of reinsurers making up Labuan IBFC’s insurance industry ecosystem.
14. Labuan IBFC will continue to preserve its competitiveness and maintain its international profile through its adherence to high standards of integrity, transparency and compliance. We will continue to facilitate business development, ease the conducting of business and support market innovation, including captive business to grow the Centre.
Ladies and Gentlemen,
15. Before I conclude, I would like to take the opportunity to thank Swiss Re and Labuan IBFC for organising this event, managing volatility via self insurance. I am sure the conference will generate ideas and more awareness on how captive structures can be leveraged on and used as part of self-insurance scheme. Along the discussion, I hope that there will also be greater awareness on what Labuan captives can offer for you and how Labuan IBFC can be your captive domicile of choice for Asia.
16. Lastly, I would like to take this opportunity to invite you all to visit Labuan, especially those who have not been to the island. I can assure you this place is not like Kuala Lumpur. In Labuan, you will certainly more fresh air and clear skies, but more importantly, it’s a centre for you to establish a captive to do your self-insurance.
Thank you.
Mr Danial Mah Abdullah
Director-General, Labuan FSA
