The Captive International Insurance Industry, with Special Reference to Barbados

• Author: Vernese Brathwaithe
• Pages: 21-36

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The Captive/International Insurance Industry

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The Captive/International Insurance Industry

with Special Reference to Barbados

Vernese Brathwaite

THIS PAPER FOCUSES on the captive/international insurance industry in

general with special emphasis on the industry in Barbados. It examines the

history and development of captives; legislation and regulation; and tax issues.

Reference is made of captive insurance industries in other offshore jurisdictions.

Captive Insurance is defined as the business of a company set up to assume

the risks of its parent and/or its affiliates.

History and Development of Captive Insurance

The captive insurance industry first started in Bermuda during the 1940s as

part of the overall planned development of its international business, when

self insurance schemes were introduced for non-Bermudian businesses which

sought not to pay exorbitant liability insurance premiums in the open market.

Some of these types of risks were also considered uninsurable. The captive

concept was adopted in Guernsey and Jersey in Europe, rapidly spread to a

number of offshore financial centres, and subsequently to the USA and Lloyd’s

of London.

Bermuda led the market continuously and by the end of the 1990s, it had

developed into a sophisticated captive insurance market. It continued to host

the pure ‘captive’ merely insuring its own parent company together with the

next level of captive taking third party risks. It then moved into the area of

‘captive companies’ acting as traditional reinsurers and to date Bermuda

engages in catastrophe risk as well as the more esoteric finite risk product.

Bermuda advanced into the transacting of catastrophe insurance business

taking over the business which had traditionally been carried on by Lloyd’s of

London but which had suffered severe financial losses as a result of property

disasters caused by Hurricane Andrew. Other jurisdictions followed and today

LEGAL ISSUES IN OFFSHORE FINANCIAL SERVICES

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the captive insurance sector is a large component of the offshore financial

services sector.

During the last two decades the captive insurance sector has developed

steadily, and over the last decade attitudes towards captive insurance companies

have changed drastically. They are now recognised as risk management tools

in their own right and it is now very certain that they are here to stay, since

there are no signs of these entities diminishing. Studies on the captives have

indicated that the number is growing steadily every year. It was estimated in

the year 2000 that the number of captives worldwide could have reached

4,000. Earlier, in 1994 there was an upturn in the licensing of new captives in

the world’s leading domiciles which, in order of total numbers of captives

licensed, are Bermuda, Cayman, Guernsey, Vermont, Barbados, Luxembourg,

the Isle of Man and Ireland. Bermuda has licensed the largest number of

captives for more than seven years.

The choice of captive domicile has also widened with both onshore and

offshore authorities competing with each other to lure captives to their own

particular location. The choice of location, however, will depend on accounting

and operational accessibility, political and financial stability, taxation,

regulation and particular needs of the captive’s owner.

Many domiciles are also seeking to establish an insurance and financial

sector in order to cash in on potential economic benefits to be realised. At the

same time owners of captives are revamping their existing captives so as to

make them work more efficiently. This trend is expected to continue as more

companies consider captives as comprehensive long-term alternatives to the

traditional insurance market, especially since some insurance coverages cannot

always be obtained from the traditional market place. Such coverage includes

environmental impairment liability, product recall and credit insurance.

The captive (international insurance) industry in Barbados

The captive (international insurance) sector in Barbados may be categorised

into types 1, 2, 3 and 4. More recently, segregated cell companies have been

introduced. In Barbados, the name ‘captive’ is given to all international

insurance companies. This nomenclature may therefore be seen as a misnomer,

but writers and practitioners in the insurance markets insist on retaining it

because of its familiarity. For the purpose of simplicity the term ‘captive’

will be applied to all international insurance entities, since they are all

established under the same legislation and are subject to the same rules and

regulations; although for regulatory purposes, the insuring third party risks

captives are more strictly scrutinized in terms of the level of start-up capital

vis-à-vis the proposed risk exposure.