A Barbados'-eye perspective of the captive insurance market
Barbados has been an established captive insurance jurisdiction since the 1980s. As the risk landscape changes, it is well positioned to adapt with the times, says Kirk Cyrus of Strategic Risk Solutions.
“Active risk financing using captives is inescapable given the expectation of future systemic risk events relating to climate change.”
Kirk Cyrus, Strategic Risk Solutions
In its 2020 “Global Risks Report”, the World Economic Forum (WEF) stated that the sustainable development of global economies would be impacted by key risks associated with the environment, technology, and public health.
That was at the start of 2020, when there was already discussion of the impact of climate change, extreme weather and biodiversity loss. Public finances were burdened by the high incidences of non-communicable diseases and the economic and social cost of their management.
The WEF’s “COVID Risks Outlook” published in May highlighted global recession as the biggest risk concern. It was concerned about corporate bankruptcy and structural issues in the economy related to deep unemployment caused by lost jobs, lay-offs and furloughs associated with the COVID-19 pandemic.
What is now certain is that risk management planning in the future must consider supply chain disruption, non-material damage losses and employee-related claims, as well as government and regulatory stakeholder intrusion.
The challenge in 2020 has been the maintenance of corporate brand value and the reorganisation and reinvention of businesses. There is now a need for faster broadband networks and cloud technology upgrades due to changing business models, alongside data privacy considerations from the workforce having to access networks from home. This is within the context of the IT security and business continuity teams having to (re)focus on “pandemic” planning.
The insurance landscape has therefore been one of continuing market hardening, as evidenced by increasing rates and deductibles, along with limits in coverage. Simply, the prevailing environment has created a lower appetite among traditional insurers despite a customer demand.
This is nothing more than a continuation of market adjustment starting with the 2017 Atlantic hurricane season and the 2018 wildfires in the US.
Insurability is being challenged by carriers, with increases in the cost of coverage and the contraction of re/insurance coverage within certain industries. Indeed, no business entity is immune, with the challenges deep and far-reaching.
Among Fortune 500 companies, balance sheet intangibles in the form of patents, trademarks and data represent a more than $20 trillion insurance coverage problem.
Barbados’ role as a captive insurance jurisdiction of importance has been well established since the 1980s. Settled by the British in 1627, this gem of the Caribbean became independent in 1966 and is credited for having the world’s third oldest parliament.
Its well-established legal and corporate governance infrastructure has supported the establishment of captive insurance companies to capture the difference in conditions or exclusions in the traditional market.
The formation of captives in Barbados commenced in 1984 with the signing of the Barbados–US tax treaty. At the time this allowed an exemption of Federal Excise Tax that was applicable to re/insurance paid to non-US corporations.
In recent times, the business from the US has been in the form of 831(b) captives. The income from these entities is exempt from Federal income tax, claims payments are tax-neutral and dividends are taxed at the existing capital gains rate.
Canadian corporations with US business operations have for a long time written business directly to Barbados captives for those exposures not covered in the market, or reinsuring through an admitted carrier. However, with now more than 30 US states having passed captive legislation, the response has been one of continuous updating of the insurance product offer in response to legislative developments.
The opportunity for captive insurance growth in Barbados will be bolstered by the fact that COVID-19 is causing a rethink of traditional lines, coupled with the need for coverage for pandemic-related risks that typically disrupt global supply chains.
Realistically, pandemic risk considerations should be included with other emerging risks such as cyber, as some of the most important for businesses to consider. It is instructive that Barbados captives are providing parametric and other insurance solutions to deal with the myriad of issues caused by natural disasters and extreme weather, terrorism, cyber crime and reputational damage.
Despite the challenges that a COVID-19 scenario poses for tourism-based island economies, Barbados remains open for business. In July 2020, the government announced the introduction of a 12-month remote working visa under the Barbados Welcome Stamp initiative. The programme was developed to facilitate non-citizens seeking to embrace the digital nomad lifestyle, and supplements the existing Special Entry and Reside Permit.
Prior to this, there was already a revision and strengthening of the country’s suite of business legislation since 2019 and the convergence of the domestic and international taxes to do away with perceived special regimes.
This has resulted in Barbados now having the lowest corporate tax rates for OECD-compliant, non-zero tax jurisdictions. The captive insurance offer is still being improved with a pathway for the reorienting and modernising of the public sector through digitisation of processes, permits and records.
The future of developing economies lies in innovation as traditional industries are being transformed by technology. Barbados already has a proper technology infrastructure in place, having understood that startups want to locate in successful creative jurisdictions. These jurisdictions, like Barbados, are characterised by cheaper costs, are technology-driven with large pools of skilled workers, have a concentrated innovative structure and a rich ecosystem of suppliers and competitors.
“Barbados is well equipped to provide the captive insurance infrastructure to assist with navigating these realities.”
The onus is therefore on the government to maintain this enabling environment in many of the ways that it has already done, including tax and regulatory benefits, economic inclusion, and governmental and infrastructure support.
The global captive insurance market comprises more than 7,000 licensed entities underwriting more than $400 billion in premium and representing 90 percent of Fortune 1000 companies. These days companies are vulnerable to systemic risk events that were previously never seen as a business priority.
Businesses must now prepare for these types of risk events whether through active threat surveillance and supply chain management, detailed response and contingency plans, or response training and testing.
The issue with COVID-19 is the chronic shortfall in budgetary prioritisation for pandemic preparedness. Active risk financing using captives is inescapable given the expectation of future systemic risk events relating to climate change that will affect essentials such as water supply and food production.
Barbados is well equipped to provide the captive insurance infrastructure to assist with navigating these realities.
Kirk Cyrus is the managing director of the Barbados office of Strategic Risk Solutions.
He can be contacted at: firstname.lastname@example.org
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