Market participants consider the captive growth in Singapore, while identifying its barriers and opportunities
Singapore is home to the largest port in Southeast Asia and some 82 captive insurers, according to the Monetary Authority of Singapore (MAS). The 82, with their gross premiums rising to US$2.2 billion, make Singapore the largest Asian captive domicile. Singapore also enjoys a long-standing partnership with the US, underpinned by the US-Singapore free trade agreement. The nation is known as the ‘City in a Garden’, as nearly 50 per cent of the island is green space.
“It’s a well-recognised choice of domicile for many reputable international companies to set up their captives, especially among corporates from Australia,” according to Aon Insurance Managers - Singapore.
James Wong, director of risk and analytics for Asia Pacific at WTW, affirms: “The majority of Singapore-domiciled captives continue to be owned by Australia-headquartered companies.”
For example, Australia’s largest retail bank Commonwealth Bank of Australia (CBA) has a Singapore-domiciled captive, CBA Captive Insurance. The captive is a wholly-owned subsidiary of CBA and its captive manager is Marsh Management Services Singapore.
Observing changing tides, Wong says: “Over the last 10 years, we have seen greater diversification including captive owners coming from Southeast Asia.”
Michael Dunsire, regional director of captive and insurance management for Aon in the Asia Pacific region, adds: “We have seen an uptake in companies from around the Asian region due to their greater awareness and maturity of the market.”
Domicile on the map
In a previous edition of Captive Insurance Times, International SOS’ chief strategy officer Franck Baron touted the region’s benefits as a captive insurance domicile in his captive owner’s interview.
When explaining why his company chose Singapore as a domicile for their captive, Odeon Re, Baron said: “The ability to develop and gain approval for a holistic business plan for (re)insurance, life and non-life avoids delays in our underwriting decisions.”
Giving a regulatory perspective, he added: “the local regulator, MAS, is providing a very stable environment and is committed to developing the captive platform.”
Singapore’s captive insurance business is governed by the Insurance Act and administered by MAS.
Ravi Menon, managing director of MAS, gave the opening address at the 19th Singapore International Reinsurance Conference on 30 October.
In it he stated: “Singapore is continuing to invest in specialist underwriting capabilities and a strong network of professional service providers to support the evolving needs of captives.”
Aon’s Dunsire notes: “Singapore is generally considered a well-rounded option due to accessibility and convenience, though it tends to favour simple captive structures due to its single class of captive licence.”
Currently pending is the introduction of the OECD’s base erosion and profit shifting (BEPS) Pillar 2 rules in various jurisdictions. With this, “Singapore’s extensive network of double tax agreements would be an advantage for corporates in minimising double taxation risks,” according to Dunsire.
Singapore will also be implementing the Global Anti-Base Erosion (GloBE) rules of the OECD and BEPS two-pillar plan, taking effect from 1 Jan 2025.
The rules dictate a domestic top-up tax will be introduced that will top up the effective tax rate of qualifying multinational enterprise groups in Singapore to 15 per cent.
WTW’s Wong notes there are two main considerations WTW typically looks at when assessing a captive domicile. These are “synergy with the insurance and risk capital market, and the talent pool — the right people with relevant skill sets on the ground.”
Additionally, political stability is important for all businesses.
Wong says: “From an Asia Pacific perspective, Singapore ticks all the boxes. It has many accounting professionals and graduates. There is both good quality and quantity of talent in Singapore. Another factor, which people typically don’t pay enough attention to, is that most Singaporeans are multilingual.”
Demonstrating Singapore’s fertile soil for captive growth, Marsh Captive Solutions found that captive premium growth increased in Singapore by 46 per cent, the highest globally. This was followed by Luxembourg, by 36 per cent, and then North America by 15 per cent.
These figures are based on cumulative growth over the past two years (2020 to 2022) and were published in Marsh’s ‘2023 Captive Landscape’ report.
It should also be noted that the uptick in captive insurance companies in Singapore is partially due to recent market conditions, reflecting the wider global trend that captive insurance companies are on the rise as hard commercial markets are pushing companies to seek alternative risk transfer methods.
Application filed
In response to these rising captive figures, International SOS’ Baron has filed an application with MAS to create a new captive owners’ association. The association will “represent the interests of the growing captive sector in the territory,” according to Baron.
Baron is the founder and former-chair of the Pan-Asia Risk and Insurance Management Association (PARIMA). The Singapore-headquartered association has members in 23 countries across the Asia Pacific region and has grown exponentially since its inception in 2013.
Now, he has turned his attention to co-establishing a representative body for the captives exclusively registered with MAS in Singapore, along with Steve Turnstall, Tunstall Associates and Kelvin Wu, Weybourne Holdings.
International SOS’ Baron says: “Currently, there is no formal dialogue with the regulator on captives and this is needed. An official dialogue is really important if you want to spread the concept out to organisations that do not have a captive yet.”
There is high interest from Singapore-based captive owners and organisations in the association.
Baron exclusively tells CIT: “As a dedicated home for the owners of captives, the association will be uniquely positioned to foster collaboration, promote understanding of the business reasons for captive insurance, and develop a strong and impactful voice for the captive industry in Singapore and across Asia Pacific.”
Its key objectives are to represent captive owners in discussions with regulatory bodies including MAS, to rally the industry to focus on attracting and retaining the next generation of captive professionals.
Hinderers to captive adoption
It is to be expected that Asian companies remain behind their global peers, such as the US, Bermuda and Cayman Islands, on captive adoption.
WTW’s Wong says: “Part of this is due to commercial insurance capacity being less expensive in the region”, compared to countries with higher captive adoption rights, such as the US.
Wong lists another, more important, factor as risk retention. “Risk retention and risk financing concepts are not as well understood in this region,” he says. “This leads to missed opportunities where insurance buyers — with capacity to take substantial risk — continue to stay with the traditional approach, therefore subjecting themselves to market-driven capacity and pricing uncertainty.”
Additional drawbacks are sizeable data gaps. MAS’ Menon said in his speech: “With healthy economic growth, additional urban centres and industrial centres have emerged in Asia, and risks have evolved. There is not enough up-to-date, high-resolution data on economic exposures to key perils in Asia…”
AM Best 2022 Global Reinsurance market segment report notes that: “After the last five years, heightened catastrophe and secondary peril activity have put investors’ risk tolerance levels to the test, and recent fears about sustained inflation and a potential recession may point to decline in overall available capital.”
The rating company’s outlook on the global reinsurance market remains stable, despite lingering economic and operational challenges stemming from the COVID-19 pandemic.
Specific to South and Southeast Asia markets, technical underwriting performance improved in 2021, but returns on equity declined owing to weakened investment returns.
MAS’ Menon said at the opening address: “The reinsurance industry is an important partner to captives. While captives manage much of the risk of their parent group, they need to transfer certain risks that the captive sponsor is unable to retain.”
Garden of captive opportunities
Aon’s Dunsire says: “Captives in Singapore are not permitted to write unrelated business and may not be able to accommodate certain corporates with unique ownership structures.”
For example, Singapore currently does not offer any form of cell legislation for the insurance sector, although MAS is looking at introducing cell legislation in the near future.
In his speech, MAS’ Menon said: “The development of segregated cell structures can potentially streamline the costs and processes involved in incorporating and managing captives.”
This area is certainly one to pay attention to as MAS commits to expanding its insurance capacity.
The association is focusing on three alternative risk transfer initiatives to expand capacity: insurance-linked securities (ILS), captive insurance and catastrophe risk pools.
For ILS, AM Best’s 2022 global reinsurance market report finds that: “The Singapore government is keen to leverage its position as a financial powerhouses to develop their respective alternative capital markets.”
Additionally, in 2018 Singapore introduced a grant scheme to subsidise upfront ILS issuance costs up to SG$2 million (US$1.5 million).
The rating agency elaborates: “The grant scheme has proven to be successful in attracting international sponsors to choose Singapore as an ILS domicile, subsequently leading to the provision of convergence for perils in Australia, Japan and North America.”
Industry participants agree that current trends are only going to extrapolate and expect Singapore to be at the fore for Asia.
Baron says: “Captives will only become more significant over time as the commercial insurance and reinsurance market retreats from the trickiest and most systemic risks, such as those related to climate change, health and cyber.”
Wong adds: “Captives can certainly be solutions to complement commercial insurance capacity or unlock new insurance capacity. Given the sizable protection gaps in Asia, we need to tap on alternative risk transfer solutions to expand capacity.”
Life Insurance Association Singapore (LIA) estimated Singapore’s protection gap to be a mortality protection gap of SG$373 billion (US$278 billion) and a critical illness protection gap of SG$579 billion (US$413 billion) in Singapore in 2022.
This translates to a 21 per cent mortality protection gap and a whopping 74 per cent critical illness protection gap in the country for the year 2022.
When estimating this amount, the LIA calculated the difference between insurance coverage that’s economically necessary and beneficial for society, and that which is actually required.
This estimate demonstrates how profitable the industry could be for insurers and captive insurers alike.
The association notes that while gaps persist, there has been progress since its last assessment of the gap in 2017, which reflects the ongoing improvements in the domicile.
Aon’s Dunsire has identified vast potential for Singapore in regards to ESG risks. He says: “As a champion for sustainable development and an international financial hub, Singapore has a strong focus on ESG agendas.
“It has introduced guidelines and consultation papers in the areas of environmental risk management and transition planning for the insurance sector.”
