Kirk Cyrus of SRS Barbados, Darren Treasure of London & Capital, and Gregory Smith of Deloitte discuss current market conditions in the captive industry of Barbados, and the landscape of emerging risks
As the most eastern of the Caribbean islands, Barbados is situated approximately 1,600 miles southeast of Miami, allowing for a relatively easy airlift to mainland financial hubs, including the US, Canada and the UK. Having existed as a fully independent sovereign nation since 1966, the captive market emerged in the 1980s following the passage of landmark legislation. In particular, Barbados is recognised as an international business domicile, which Gregory Smith, business consultant at Deloitte, notes is a result of the island’s established international reputation, and robust infrastructure and workforce.
This is complemented by the available range of professional services, such as an established legal profession and international accounting firms providing tax, advisory and corporate services.
However, an A.M. Best country risk report published in August this year determined Barbados to be in tier 4 (‘high’) for both economic risk and financial system risk, as the rating agency identified that Barbados’ economy has been in contraction since 2017 owing to reconstruction efforts following Hurricane Irma.
In addition, the COVID-19 pandemic and the heightened frequency and severity of natural disasters has highlighted the vulnerability of many Caribbean countries that depend heavily on tourism — in the case of Barbados, tourism accounts for more than 35 per cent of the gross domestic product (GDP).
The report determined that in 2020, the GDP of Barbados contracted 17.6 per cent; however, this is projected to grow by 4.1 per cent in 2021 and 7.7 per cent in 2022 respectively.
Kirk Cyrus, managing director of SRS Barbados, affirms: “2020 was characterised by a contraction in global GDP, primarily due to the COVID-19 pandemic. Despite this slowing of economic activity, on the flip side there were further opportunities for the use of captives to solve new and emerging insurance risks.”
Smith adds: “Companies of all sizes are thinking more about their insurance programmes and all lines of coverage, which has created increased interest in the captive option, while existing captive owners are also looking at ways of increasing utilisation of existing structures.”
The captive industry in Barbados is predominantly driven by the US and Canadian markets that use the islands as a captive domicile, according to Darren Treasure, executive director, Caribbean, London & Capital.
“For 2021, there has been a very uplifting and optimistic market outlook here, the majority driven by the continuation of the hard market, which is encouraging US and Canadian companies to consider self-insurance through a captive, and Barbados tends to be a very popular destination for those companies,” Treasure explains.
This is affirmed by Cyrus, who notes that price increases, declining capacity and increasing deductibles have continued in an upward trend over the last three years in the commercial insurance market, therefore galvanising interest in alternative risk.
“The high interest and awareness in captives is consistent with the many new formations across all the major domiciles, and this includes Barbados,” he explains.
“These entities have been at the forefront of recent insurance renewals by providing purchasers with a stronger negotiating position within the market. Some will make the further point that the insurance market has not been this hard since as far back as the mid-1980s. The reality is that alternative risk financing in the use of captives is critically important.”
Furthermore, Cyrus identifies that captives are being utilised for an ever-increasing list of coverages, from management liability (such as directors and officers or fiduciary liabilities), medical stop-loss and voluntary employee benefits in group captives to specific catastrophe exposures in a reinsurance pool.
For Barbados captives in particular, insured risks range from natural disasters and extreme weather to terrorism, cyber and reputational damage, among others.
A.M. Best’s market segment report from December 2020 determined that rated captives in Barbados, Bermuda and the Cayman Islands continued to outperform their US commercial casualty peers in terms of both underwriting and operating profitability.
The report found that the advantages and consistency of local captive management and associated regulations have allowed the group of domiciles to maintain and expand their presence in the captive market.
“The landscape in Barbados is experiencing a very similar trend to what the global insurance market is doing, again predominantly driven by the hard market,” explains Treasure.
He adds that this “growth opportunity” is also driven by the formation of new emerging risks that lack coverage in the commercial insurance market, such as cyber and pandemic risks.
“As organisations realise there are no insurance solutions in the commercial market, they turn to captive insurance to cover some of that risk. So, the landscape for captives in Barbados is within the industry trends, and there is some growth niche here as well.”
A.M. Best also noted in its market segment report that the largest captive managers and advisors have a global reach beyond the domicile, allowing for strong retention and growth in the number of captives registered in Barbados. Of these companies, ratings remain in the ‘A’ to ‘A-’ range as a reflection of their generally robust balance sheets, integrated risk management practices and the inherent advantages of being owned by member insureds.
Latin America is also a significant growing segment of the captive industry in Barbados, attributable to the experienced employment base that is well versed in setting up and managing a captive while adhering to economic substance rules.
There are efforts to develop a double taxation agreement (DTA) with Mexico alongside similar arrangements with Panama, Venezuela and Cuba, mirroring the US-Barbados DTA of 1984 that began the captive market in the domicile, as it allowed an exemption of the federal excise tax usually applied to reinsurance or insurance paid to a non-US corporation.
Cyrus notes: “While Barbados has not evidenced the same volume as some of the other established domiciles since [the US-Barbados treaty was in effect], it is undeniable that the country remains an important domicile. The expectation is that formations will continue, with an expansion in lines of coverage and premium.”
He adds that this expansion of the captive industry will be judged by the island’s ability to obtain a significant share of the premium market volume, as the Government of Barbados has made attempts to facilitate this process by modernising the public sector, establishing the government economic development agency Invest Barbados, and updating insurance regulation.
The regulatory environment of Barbados has certainly evolved to more effectively address systemic changes in the commercial market and burgeoning interest in alternative risk.
Originally, the captive industry in Barbados began by operating under the Barbados Exempt Insurance Act, which qualified an exempt insurance company as a firm incorporated in Barbados with a minimum capital of US$125,000 and at least one director as a resident citizen of Barbados.
Exempt insurance companies were not taxed on their profits for the first 15 years, after which they paid a rate of two per cent on the first $250,000 worth of profits. Other incentives for this qualification included no requirements to file tax returns or publish financial information, reasonable solvency requirements, and provisions for inward and outward re-domiciliation.
Although this legislation expired in 1991, it was fundamentally instrumental in allowing Barbados to construct a solid reputation as a good captive domicile. Exempt insurance companies are now governed by the Insurance Act, which has three separate classes of insurance licence.
Smith adds that captive and insurance entities licenced under this legislation are governed by the Financial Services Commission of Barbados, which is responsible for establishing standards for the control and management of risk in the financial services sector, and promoting stability, public awareness and confidence in the operations of financial institutions.
In another A.M. Best segment report, the rating agency identifies that the Organisation for Economic Cooperation and Development’s framework against base erosion and profit shifting meant that Barbados had to reevaluate its insurance legislation to ensure all ring-fencing was removed to remain compliant while still remaining an attractive captive domicile.
Cyrus explains: “Barbados has sought to participate in the discussions involving the finance leaders from the G7 in relation to the global minimum corporate tax rate from the perspective of how this affects current and future captive owners.”
He adds that anti-money laundering and economic substance requirements are regarded as an opportunity for Barbados compared to other competing domiciles, owing to the island’s highly educated local workforce, which means the insurance sector is far less reliant on foreign professionals.
Smith adds: “Barbados’ strength over the years has been its infrastructure, in particular its people. When clients come to Barbados, most of the people they will interact with — be it captive managers, attorneys, auditors or other service providers — will be well-qualified and experienced Barbadian nationals.”
Smith points out that this enables clients to form long-term relationships with service providers, which provides advantages against competing domiciles that may have a higher turnover.
Treasure summarises: “As far as the regulatory environment goes, we have a very capable, knowledgeable and accessible regulator that is willing to work closely with captive managers and captive owners to help form new captives.”
“Barbados has a very strong reputation for good regulation, as captives and all financial services have always been regulated industries here. The strong regulatory presence is very accommodating in bringing the right types of companies and captives here to Barbados,” he continues.
Treasure highlights that this is because regulators are working together to achieve a common goal: to bring growth and economic prosperity to Barbados. Therefore, they value the contribution of captives to the Barbadian economy.
Cyrus echoes: “What Barbados offers captive owners is certainty of legislation, transparency, and regulatory compliance within the framework of international best practice. Paramount in whatever the domicile does is that the right environment must be created to thrive in a fast-developing global landscape.”
Examining this context of the global landscape, like so many countries and industries, the captive sector in Barbados suffered as a result of the lockdowns imposed during the COVID-19 pandemic, with Treasure stating: “In my own personal experience, and similar experience with others, the ability to travel, make new relationships and strengthen networks in the captive sector has been difficult as a direct result of the COVID-19 pandemic.”
Building on his earlier point, Cyrus identifies that the pandemic was conducive to creating an environment of lower appetite among traditional insurers, causing existing captives to seek to address contingent business interruption relating to supply chain, trade credit and loss of customers and suppliers.
Smith elaborates: “COVID-19 has added another layer of complexity to the analysis of insurance requirements of any business. One would think that this creates opportunities in the captive market as a captive allows more control in terms of the level of risk that can be retained. Even now, captive insurance solutions are necessary since new capital is required to absorb market volatility. This must be in response to the significant withdrawal of capacity that has been the commercial market’s response to the many new and complex risk challenges,” Cyrus adds.
Treasure notes that as the industry and the rest of the world (particularly Canada and the US as they drive Barbados as a captive domicile) begins to open up again, Barbados inevitably benefits as companies reignite interest and discussions around the domicile and plans move forward once again.
Moving forward, Treasure points out that there are always new emerging risks for which the captive industry can provide a solution. He identifies over-regulation and a lack of business facilitation as potential challenges — this is an issue that is frequently discussed within different forums in Barbados to improve the business facilitation aspect of the domicile.
Specific to Barbados, being situated in a hurricane region means that companies looking to set up a business in the jurisdiction must consider that they will be subjected to certain emerging environmental risks, which Treasure warns could impact the captives and staff that operate out of Barbados.
Cyrus adds that the agriculture sector poses an interesting discussion point for future captive coverage, with specific risk exposures “relating to crop production in the form of organic or genetically modified crops, the type of product as in the case of cannabis, the impact of weather on output, and even a business’ contribution to pollution and environmental impairment”.
“Because captives are all about risks, emerging risks can sometimes be a good thing — they can be an opportunity for a captive to ensure that risk or to self-insure. So as far as the industry goes, as long as there is risk out there, the captive industry is here to stay,” Treasure concludes.
