With captive insurance to have a primary focus in Labuan IBFC’s five-year strategic roadmap, Annie Undikai, managing director of Brighton Management and deputy chairman of LIIA, talks to Rebecca Delaney about Labuan IBFC’s position as one of the fastest-growing risk and reinsurance intermediation centres in Asia
How do you assess current market conditions for the captive industry in Labuan IBFC? What about the landscape?
There has been encouraging growth in the captive industry in Labuan International Business and Financial Centre (Labuan IBFC). A total of 18 new captives were approved as at Q3 2021, which was a marked increase from the seven captives approved over the same period in the previous year. We foresee that this momentum will continue in 2022 in tandem with the hardening of the insurance and reinsurance markets, with business owners looking for alternative risk transfer solutions that could provide better cost efficiencies, as well as flexible solutions in managing their risks. Home to more than 60 captives and a growing number of cell captives, Labuan has become a very important captive domicile in the Asian region. Labuan IBFC is also the only jurisdiction in Asia that provides for the protected cell company (PCC) structure; both conventional and Shariah-compliant.
In terms of the captive landscape, there is growing awareness and interest around the benefits of captives in Asia as more companies look to use this risk transfer tool as a complement to their traditional insurance programmes. The growth in captives will also be precipitated by increasing demand from companies that were forced to review their risk management approach and strategy due to business interruptions and economic distress caused by the COVID-19 pandemic.
The pandemic is a stark reminder that the impact of a ‘black swan’ event on business can be simultaneously pervasive and long-tailed. This underscores the need for businesses to consider self-insurance, such as captives, as part of their overall corporate risk management strategy rather than as a separate entity. As a result, businesses are using their captives more strategically, with many using existing captives for different lines or limits of coverage.
The pandemic has also brought emerging risks — such as cyber risks, climate change, supply chain risks and data breach — very much into focus. Characterised by lack of historical data, emerging risks have dissuaded commercial insurers from pricing coverage competitively. Through their customisable coverage and flexibility, captives are a suitable risk management tool for mitigating emerging risks, which are often unquantifiable, difficult to price and lack commercial market solutions.
With the hard market set to continue well into 2022, captives are increasingly becoming more attractive as a risk retention tool as more small- and medium-sized companies (SMEs) turn to captive insurance to self-insure their risks. It has been a longstanding belief that self-insurance vehicles like captives were only accessible to large multinational corporations and businesses. However, the availability of cell captives and master rent-a-captives offered in Labuan allows for the ‘democratisation’ of self-insurance vehicles, thus lowering entry barriers for SMEs.
How is the regulatory environment of Labuan beneficial for captive owners, particularly with regards to PCC legislation?
Labuan IBFC provides the ideal ecosystem for the establishment and management of captives, while the strong banking and corporate services industry provides for a seamless one-stop jurisdiction for captive insurance entities. In comparison to other captive markets, the current Labuan legislation is regarded as among the most market-adaptive, particularly the provision on PCCs. To date, Labuan is the only jurisdiction in Asia to offer both conventional and Shariah-compliant PCCs, thus making Labuan a key player in the global conventional and Islamic captive insurance sectors. In addition, the robust regulatory regime provides Labuan with the capability to host and provide the appropriate solvency and capital protection needed for the captive sector. Labuan also offers a fast-track authorisation process, which means that the whole application for captives formation can be turned around within 14 days. This is the most significant development and innovation in cell captives, as the fast-track or pre-authorisation process has improved the speed of establishing captives.
Labuan IBFC provides a wide range of innovative captive solutions, such as PCCs, master rent-a-captives, group captives, multi-owner captives, and subsidiary rent-a-captives. This broad range of solutions enables businesses that establish their operations in Labuan with maximum flexibility as they develop and mature over their individual lifecycles.
The Labuan International Insurance Association (LIIA) is extremely pleased that the regulator, Labuan Financial Services Authority (Labuan FSA), has earmarked the captive sector in Labuan as a primary focus in the Labuan IBFC’s strategic roadmap for the next five years. This is indeed opportune and timely. LIIA is always happy to work together with Labuan FSA to develop the captive sector further, and we see exciting days ahead for the sector.
What are the most significant challenges facing the captive industry, in Labuan and as a whole?
There are two critical factors that are still challenging us today: the lack of skilled human capital based in Labuan, and finding the right balance in a taxation regime that can meet both government and industry objectives. As a representative of the industry players, LIIA deliberates with the relevant authorities on many legal tax interpretations. Our ultimate objective is that the Labuan taxation regime should be amenable enough that they would not discourage new entrants in the market.
The captive industry as a whole faces mounting regulatory and fiscal compliance burdens such as the Organisation for Economic Cooperation and Development’s base erosion and profit shifting framework, and the upcoming IFRS 17 implementation. Despite these regulatory challenges, a growing number of companies are looking at captive structures due to the prolonged hardening market, which is characterised by increased premium and reduced capacity in the market.
Furthermore, regulatory and tax pressures that require an increase in substance suggests that smaller captives could struggle to be commercially viable given the operational costs associated with running captives. However, PCCs are an attractive solution, as this captive structure is more cost-effective than forming a standalone captive. With a PCC, smaller corporates are able to access the benefits of captive insurance without needing to set up the infrastructure themselves.
What emerging risks have been identified in the pipeline for the captive industry in 2022?
With the corporate risk landscape constantly shifting and changing, 2022 will see continued formation of new captives, with innovation and technology being key drivers. This follows increasingly complex risks and the greater willingness of business owners to manage them. In 2022 and beyond, the industry can expect to see growth in captives, manifested not only in an increase in the number of new captive formations, but also in the expansion of existing captives to finance risk across a wider range of coverages and different lines of business.
The types of risks that companies are now exposed to have dramatically shifted in the last decade toward coverage for emerging risks such as cyber, business interruptions, supply chain and climate change. Captives for cyber risk coverage are anticipated to take off in 2022 owing largely to the acceleration in the implementation of digital transformation programmes and trends associated with cyber risks, which are the direct result of the global pandemic.
As the financial and economic effects of the COVID-19 pandemic continue to put a strain on businesses, managing supply chain risks have emerged as one of the top concerns for businesses worldwide. The COVID-19 pandemic and the Suez Canal blockage highlighted the fragility of global supply chains and their interconnected impact on business operations. As such, the industry can expect to see more businesses turning to captives to address these risk factors and circumvent business interruptions.
In the face of escalating healthcare costs underpinned by a hardening insurance market, tightening insurance capacity and greater pressure for employers to offer more comprehensive benefits; companies will increasingly turn to captive insurance to fund their employee benefits programmes. An employee benefits captive can be structured to provide medical stop-loss, retiree benefits, group term life and long-term disability, and enables businesses to achieve cost reductions and more control over their plans.
There have also been enquiries on parametric insurance. For example, the use of captives as a mechanism for structuring parametric weather insurance has steadily increased in recent years as companies are forced to take on more catastrophe related risks. This trend is likely to continue moving forward.
Climate change events such as floods, tropical storms, droughts, pollution and sea level rise have led to contingent business interruption losses, from physical damage to global supply chain disruptions and impacts on healthcare. These are a hugely prominent risk for many businesses. Although these events may be insurable, they are often either too difficult to insure on the commercial markets or are too expensive to be insured.
As climate change threatens to bring more extreme events and as severe weather events become a greater point of global concern, risk management frameworks will need to account for risks related to climate and weather. Many companies now consider captives as an appropriate risk management tool to mitigate climate-related risks and improve their climate resilience.
What will be top of Labuan’s captive development agenda for 2022?
As an industry player, LIIA works closely with Labuan FSA to realise the strategic roadmap for the captive sector. Thus, moving forward, we would like to see more measured flexibility in allowing captives to underwrite third-party risks, especially for ‘uninsurable’ risks. The earnest focus on commercial risks prevalent in Malaysia’s economy can be used as a starting point for further captive introduction in Labuan, in collaboration with Bank Negara Malaysia players. In addition, joint promotional activities by Labuan players with Labuan IBFC for PCC structures can capitalise on Labuan’s inherently advantageous position in terms of its regulations relative to Singapore and Hong Kong.
