Captive Alternatives
Puerto Rico Private Insurance: the right place and the ideal vehicle
There are many different domiciles for a new insurance company, each with its own advantages and disadvantages. One that is definitely worth considering is Puerto Rico, says Emilie Gastley of Captive Alternatives.
“Private Insurance is distinct from captive insurance but within the alternative risk transfer space.”
Emilie Gastley, Captive Alternatives
When selecting an insurance jurisdiction, every industry expert has an opinion on the best destination. Some risk managers appreciate the regulatory flexibility and expertise of offshore domiciles such as Bermuda or Cayman. Others are adamant that onshore is the best way to go, with more localised regulation and oversight.
At CapAlt, we’re confident we’ve found the ideal domicile for our private insurance risk transfer vehicle: the “near-shore” Commonwealth of Puerto Rico. Despite economic and environmental challenges, Puerto Rico’s insurance industry has flourished in recent years.
Although Puerto Rico has fiscal and tax autonomy for most purposes, it is a territory of the US and under US Department of Justice jurisdiction. Puerto Rico’s geographical location makes it an ideal bridge between Latin America and the US which, along with a fully bilingual corporate culture, makes it a completely unique insurance domicile.
Using a cell
Insurance companies doing business in Puerto Rico are regulated rigorously by both the Asociación de Supervisores de Seguros de Latinoamérica and the Office of the Commissioner of Insurance, which is an active member of the National Association of Insurance Commissioners.
CapAlt is an insurance consultancy that helps business owners manage risk by finding innovative ways to finance future losses. It gives them opportunities to share in the insurance profits that would otherwise be lost to “big insurance”. CapAlt’s pioneering risk management strategy, Private Insurance, is an alternative approach to business insurance that protects businesses, improves coverage and rewards business owners for effective risk management.
What drew CapAlt to Puerto Rico was the island’s well-established protected cell legislation, allowing us to offer a unique insurance product. Private Insurance is distinct from captive insurance but within the alternative risk transfer space.
A protected cell company is a corporation composed of assets contained in structurally separate cells. Funds allocated to a specific cell are protected from the creditors of the reinsurance company and each individual cell is not liable for the contractual liabilities of other cells.
In Private Insurance, 100 percent of enterprise risk policy premiums are ceded to a reinsurer—a protected cell company domiciled in Puerto Rico. Within the protected cell, risk is distributed to multiple parties under a quota share arrangement whereby 40 percent is allocated to a funds withheld risk reserve (FWRR), and 60 percent flows to the segregated asset plan (SAP) linked to the policies of the individual business.
When an approved claim occurs, the FWRR and SAP are each obliged to pay 50 percent of the claim. At the end of the claims period, the net FWRR funds are fully allocated to the SAP, at which point these funds are no longer subject to any further FWRR contractual liabilities and are subject to funding only 50 percent of the claims associated with the specific policies linked to the SAP. Over time, if claims remain low, the funds linked to the SAP continue to grow and compound for the length of the programme.
How it works
Private Insurance not only gives business owners protection against potentially catastrophic losses—it also gives a designated investor the opportunity to participate in the reinsurance profits via an insurance-linked security (ILS). This ILS programme allows the business owner, or a designee, to purchase a bond from the reinsurance company. Funds that are not needed for claims by the end of the policy period can grow via investment.
In contrast to a commercial insurance arrangement, where there is no return on premium dollars regardless of claims, Private Insurance participants not only receive crucial business insurance coverage, but also benefit from underwriting profit earned by the reinsurer. In fact, the business owner may have effectively reduced the cost of insurance to almost zero through strategic risk management.
Private Insurance is a powerful alternative risk vehicle unique to CapAlt that allows clients to manage business risks and increase enterprise value. Puerto Rico is the insurance destination that makes it possible.
Emilie Gastley is director of marketing at Captive Alternatives. She can be contacted at: egastley@captivealternatives.com
