How significant is the captive concept in Latin America right now?
There have been dramatic changes in the market, especially economic changes, which have led to an increase in the captive concept in Latin America.
As part of the changes, there have been down-turning economies and a change in political systems with people moving from the left to the right, which has led to a more open economy and created an ease of doing business in the region.
In addition, corporate tax rates have increased in most of the larger countries, however, we have also seen currency devaluations, which have been major. In Mexico, one of the largest economies in Latin America, there was a 15 percent currency devaluation just after the US presidential election. Chile has seen a 12 percent devaluation, Colombia had a 20 percent devaluation, and Brazil had a 23 percent devaluation.
All the major countries and economies had currency devaluations, which have led to them trying to find alternative ways to use captives, in terms of valorising their local currencies. It has been a perfect storm for captives to come into play with economies taking a different turn.
Providers such as ourselves have also been educating clients. I think the biggest hurdle in Latin America at the moment is having a lack of awareness of the captive concept.
To help educate clients, companies like us are setting up offices in Latin America, which are regional offices instead of trying to touch the Latin America market from other captive domiciles. We are actually moving towards the client and the risks.
Is regulation still holding the Latin America captive insurance market back, and if so, what is being done to change this?
Historically, regulation has been one of the largest obstacles, but Colombia has opened up its market to allow direct writing for certain captives and now Brazil, which used to only allow 40 percent of reinsurance and insurance to be placed outside of the country, is soon moving to allow 80 percent, after a decision from the government superintendent.
It is good to see that larger countries are starting to understand and embrace the captive concept.
It is essentially a product of global trade—you can get cheaper pricing outside of your country than you can in a closed-country economy.
Charles Taylor recently expanded its presence in Latin America with a new office in Panama. Have you seen an increase in demand for captive insurance services in the region?
Panama is widely regarded as the financial hub of Latin America and that is one of the reasons why we chose the location. Other reasons include the presence of small-to-large companies in Panama, and the fact that decision makers are either based in Panama or visit quarterly for board meetings.
Panama is also a major hub in terms of travel, so we can get to our clients within a few hours. After all, it is very difficult when you are in Bermuda or London to try and get someone from Latin America on the phone.
We also recently launched a new product. We have tried to go back to the captive concept, because it was a strange or difficult concept to sell to Latin America initially.
At Charles Taylor, we have created a very simple product to help them to understand the captive idea, whereby the reinsurance market covers the original client’s catastrophic deductibles.
The original insured will have a catastrophic deducible cover backed in the reinsurance market via a segregated cell captive that we create.
In the event of no loss, net profits accumulate within the cell, which enables the client to build up significant reserves over an extended period of time. The aim is for the entire deductible limit to be fully funded within a certain amount of time and amount of years.
How is the risk management function in Latin America developing? Are risk managers becoming more conscious of their needs in this area?
It is developing at a slow pace. It is something that some of the larger companies have embraced but the small and medium-sized companies are yet to embrace because of additional cost.
What we are trying to do is fill the void for risk managers who are not necessarily paying attention to those small and medium-sized companies.
Are there sufficient people with risk management skills and experience in Latin America to fully realise the benefits of captive insurance? How is Charles Taylor staffing its new office?
Risk managers are typically focusing on the large companies and have not moved their services down to the small and medium-sized companies. That is where we come in.
We are staffing our new office with local talent. One of the benefits of Panama is that it has infrastructure in terms of large commercial buildings and an English speaking high-level group of employees, due to the financial centre being here, as well as the US presence running the Panama Canal over decades gone by.
We are very excited about the new initiative in the Latin American market as a growth market, not only for captive services but also for our wider services in loss-adjusting and insurance technology. The Latin American market is increasingly important to us as a group.