Singapore maintains its place and reputation as the top Asian domicile but industry experts warn it also needs to keep pace with international regulatory frameworks
Singapore is a sovereign island city-state in maritime Southeast Asia. The island licensed its first captive in 1983 and is now the largest Asia Pacific (APAC) captive domicile as well as one of the largest reinsurance centres in Asia.
Currently, Singapore has 79 captive insurers in Singapore, according to a spokesperson for the Monetary Authority of Singapore (MAS).
Earlier this year, the Singapore government revealed the extension of the Insurance Business Development (IBD) umbrella scheme and the IBD captive insurance scheme until 31 December 2025.
Under the current IBD-captive insurance umbrella scheme, approved insurers are granted a concessionary tax rate of 10 percent for five years on qualifying income derived from the carrying on of onshore and offshore life reinsurance, onshore. The extension will continue to allow a 10 percent tax rate for a further five year period until 2025.
Alastair Nicoll, regional director at Aon captive and insurance management, explains that there are a number of captives who are still enjoying the tax incentives under the old scheme, which will only expire in 2026.
For this group of captives, the extension of the IBD captive insurance scheme will not have an impact and they will have to wait to see if the IBD captive insurance scheme will be further extended after December 2025 and if there will be changes to the scheme.
Nicoll outlines that for those captives that have their current tax exemption or concession status expiring before December 2025, they can apply for the IBD captive insurance scheme.
However, there are now headcount requirements under the IBD captive insurance scheme, whereby applicants are required to have a minimum of two qualifying professionals to undertake the substantive activity of the captive.
Nicoll adds: “Captives that intend to apply for the IBD scheme will have to assess the costs/benefits and consider the operating model of hiring the two qualifying professionals instead of fully outsourcing the management services to a third-party manager.”
Captives will be taxed at the normal corporate tax rate of 17 percent if they decide not to apply for the IBD captive insurance scheme.
Reflecting on the opportunities provided to captives under the scheme, Chris Lim, financial analyst at A.M. Best, suggests that captives who qualify under the scheme can stand to benefit from these tax incentives.
Lim says: “The extension of the scheme will likely encourage companies to further consider the benefits that an investment in a captive can bring to the table, in particular given the evolving market conditions and capacity.”
Growth potential
A 2019 A.M. Best report highlighted Singapore as one of the countries in APAC, where they saw an “abundant growth potential” for the captive sector. There is a lot of focus by the Singapore government on the development of the infrastructure to support the growth of the captive industry.
Lim explains that Singapore is committed to ensuring compliance with the Organisation for Economic Co-operation and Development (OECD) minimum base erosion and profit shifting (BEPS) standards and is constantly reviewing the relevance of its incentive schemes to the evolving economic and regulatory landscape.
“The refinement of the scheme, with additional qualitative and quantitative requirements, was necessary to meet the evolving OECD BEPS minimum standards,” Lim adds.
Nicoll suggests that captives are part of the Singapore government’s plan to grow the country to be a global capital for Asian risk transfer.
He states: “There have been strong efforts made in the development and upgrading of skills and expertise required by the sector, development and support of educational and research institutions as well as the development of the infrastructure to support the insurance sector in Singapore.”
This also includes the establishment of the Financial Sector Development Fund to facilitate the development and enhancement of talent and other infrastructure for Singapore’s financial centre.
Market conditions
The market conditions continue to evolve in the APAC region.
Lim suggests that where shifts in pricing and policy coverages are seen, use of a captive solution is often evaluated as some risks can be difficult to insure in the commercial market, either because of a lack of suitable products for the risk or a lack of appetite from insurers in terms of price or coverage.
Singapore has also seen a lot of interest from clients and prospects around the whole APAC region in setting up captives due to the hardening insurance market.
Nicoll says: “Our current clients too are re-evaluating their captive programmes more frequently and often use their captive to fill any gaps in the programme or where the captive can help mitigate the effects of increasing pricing.”
Although Singapore maintains its place and reputation as the top Asian domicile, Nicoll suggests that it is under pressure from regional as well as international domiciles that offer more classes of insurance license and structures to cater to different needs of clients.
He notes: “The MAS should consider the application of the variable capital company structure to the insurance industry as this brings more enquiries and especially provides a faster route to market as companies ready themselves in preparation for renewals.”
The market maintains a robust regulatory framework, but Lim says it also needs to keep pace with international regulatory frameworks, such as BEPS, to avoid being classified as promoting tax competition unfairly.
Along with fulfilling compliance requirements, Lim notes that Singapore will also have to compete with other captive domiciles.
He says: “This necessitates the constant need to upgrade and maintain the relevance of the workforce, facilities, infrastructure, and the ancillary services that support it being a finance and insurance hub.”
ILS
Singapore aims to be a global capital for Asian risk transfer, offering a wide spectrum of risk financing solutions to bridge Asia’s climate and disaster protection gaps. According to a spokesperson of the MAS, this includes insurance-linked securities (ILS) bond issuances that offer issuers an alternative risk transfer avenue and access to a diversified investor pool.
To catalyse the development of the ILS market in Singapore, in February 2018, the MAS introduced the ILS grant scheme, which seeks to fund up to 100 percent of upfront ILS bond issuance costs in Singapore.
In March 2019, the first catastrophe bond was issued under the ILS regulatory regime. The bond is sponsored by Insurance Australia Group (IAG), while GC Securities, a division of Marsh and McLennan Companies, acted as the sole structuring and placement agent.
Nicoll suggests this bond issued, being the first in Singapore, has provided comfort to potential sponsors on the regulatory framework for the special purpose reinsurance vehicle (SPRV) which was previously untested.
Since the IAG bond, there have been seven more catastrophe bonds issued by SPRVs established in Singapore.
Nicoll explains: “The majority of the sponsors are from the US covering US perils and the choice of Singapore as the domicile has been driven mainly by the ILS grant scheme which funds the entirety of the upfront costs involved in issuing the catastrophe bonds, up to SG$2 million.”
“We have also seen the first Asian sponsor, Mitsui Sumitomo Insurance setting up their SPRV in Singapore this year, issuing the first Asian sponsored catastrophic bond in Singapore covering Asian perils,” he adds.
Looking towards the next five years for Singapore’s ILS sector, Nicoll expects the extension of the ILS grant scheme to the end of 2022, will continue to attract potential sponsors and contribute to the growth of the market.
“We are hoping that Singapore will attract more Asian sponsors and continue to grow its ILS infrastructure to become an efficient domicile of choice for the Asian market that is within the same time zone,” he adds.
In the longer term, Nicoll notes that they hope to see Singapore expand its offering to other range of ILS instruments other than the traditional catastrophe bonds, including collateralised reinsurance and sidecars.
But, he adds that this would require changes to the current regulatory framework and legal structure such as the protected cell company structure.
