As international commercial insurance rates harden, interest in captives is growing in the Gulf Cooperation Council (GCC) region, according to the latest A.M. Best report.
While the global captive insurance industry has experienced steady growth over the past decade, the use of captive (re)insurers in the GCC countries has been limited to date.
However, A.M. Best explains that an increasing interest in the creation of new captives in the region, with multiple potential owners undertaking feasibility assessments or seeking regulatory approval.
The rating firm highlights that the interest has not only come from the traditional users of captives — the energy and heavy industry sectors, and state oil enterprises.
A wider gamut of companies is now investigating self-insurance solutions in response to hardening rates in the international commercial insurance and reinsurance markets. In addition, companies in the region are becoming increasingly sophisticated in their risk management.
Many primary insurers responding to hardening reinsurance market conditions by opting to retain more risk.
“This is prompting large insurance buyers in the region to look for a more cost effective way of managing their insurance risks and potentially recapturing some of the underwriting profit and commissions which would otherwise be enjoyed by external insurance carriers and intermediaries,” says A.M. Best.
For captive sponsors outside the GCC, low tax jurisdictions have historically provided parent groups with tax advantages through base erosion and profit sharing schemes.
But A.M. Best says tax savings are not a driver for the increased captive interest in the GCC as jurisdictions in the region that apply corporate tax do so at very low rates.
Meanwhile, the introduction of captive-specific regulation, and the availability of experienced third-party captive managers to oversee the operations, have made the process of establishing a new captive easier.
Several GCC financial services regulatory authorities have introduced dedicated captive-specific legislation recognising the particular dynamic between a captive and its parent.
A.M. Best says: “Most of these jurisdictions have identified three classes of captive — single-parent captives, captive with a mandate to source a limited portion of premiums in the commercial market and mutually-owned captives — with some also identifying a fourth class.”
“In general, captive-specific regulation in the region has been modelled on international best practice, with similar features to well-established captive domiciles such as Bermuda and Guernsey,” the rating firm adds.
An alignment of factors is creating an attractive environment for captive development across GCC, including a hardening commercial (re)insurance market, positive regulatory developments, maturing risk management among regional companies, and the availability of professional management services.
A.M. Best concludes: “A captive insurance company can form the centrepiece of a sophisticated risk management and treasury function for large industrial groups, giving more visibility to and control over risk management, retention and transfer.”
