Henry Brandts-Giesen and Jackson Tu’inukuafe of Dentons talk about key domiciles for captive insurance in Asia Pacific
Captive insurance can bring significant benefits to businesses, including enhanced coverage for risks that are expensive, unidentifiable, or otherwise uninsurable in the commercial insurance market. As an insurance company itself, a captive can provide bespoke insurance policies designed to fit an organisation’s specific risk needs.
In APAC, the key domiciles for captives are New Zealand, Singapore, Hong Kong, Labuan, and the Cook Islands. However, captives can be set up, and are popular, in most offshore jurisdictions, including Guernsey, Bermuda, the Cayman Islands, as well as some states in the US. Determining the captive’s domicile is crucial for evaluating its viability, as it significantly impacts its administration factors like formation ease, regulatory environment, regulator flexibility, administration cost, accessibility, communication, and convenience.
Singapore
Singapore has emerged as a prominent captive domicile in the Asia Pacific region due to its strategic location, favourable regulatory environment, and robust financial infrastructure. Singapore’s geographical location at the intersection of East and West, positions it as a natural hub for business and commerce in the region. Its proximity to major Asian markets, including China, India, and Southeast Asia, offers strategic advantages for family offices and trading businesses, which are important use cases for captive insurance.
Singapore also boasts a well-established and transparent regulatory framework for insurance and financial services, which is conducive to the formation and operation of captive insurance companies. The Monetary Authority of Singapore (MAS), the country’s central bank and financial regulatory authority, provides a stable and business-friendly environment, offering regulatory certainty and guidance to captive insurers.
MAS offers a straightforward licensing process for captive insurers, enabling efficient setup and operations while also adopting a risk-focused approach to supervision, tailoring regulatory requirements to the specific risk profiles of captive insurers. Singapore maintains stringent prudential standards to protect policyholders’ interests and maintain financial stability in the insurance sector. Moreover, MAS actively promotes innovation in financial services, encouraging captive insurers to explore new technologies and business models to enhance efficiency and competitiveness.
Additionally, Singapore has a world-class financial infrastructure, characterised by a robust banking system, sophisticated capital markets, and a wealth of professional service providers.
Captive insurers benefit from access to a wide range of financial products and services, including reinsurance, investment management, and risk consulting, enabling them to effectively manage their risk portfolios and optimise returns. The city-state’s reputation as a global financial centre enhances the credibility and visibility of captive insurance entities domiciled in the jurisdiction, instilling confidence among stakeholders and counterparties.
Hong Kong
Hong Kong’s evolving captive insurance landscape, recent regulatory enhancements, and potential for growth position it as a promising APAC domicile. The jurisdiction’s captive landscape has been experiencing notable developments, driven by factors such as its mature insurance market and robust financial infrastructure, providing a solid foundation for the growth of captive insurance. Businesses and family offices in Hong Kong and the wider region recognise the value of captive insurance in managing risks more effectively, driving demand for captive solutions.
Hong Kong’s mature insurance market and robust financial infrastructure provide a solid foundation for the growth of captive insurance. Industries such as financial services, healthcare, and logistics increasingly view captive insurance as a strategic tool for diversifying risk and optimising risk financing strategies.
The jurisdiction has made significant regulatory enhancements to strengthen its captive insurance framework. In 2018, captive-specific legislation was introduced, providing a clear regulatory architecture for the establishment and operation of captive insurers. Additionally, the Hong Kong Insurance Authority (HKIA) adopts a risk-based supervision approach, tailoring regulatory requirements to the risk profiles of captive insurers, ensuring effective oversight while minimising regulatory burden. The HKIA has implemented enhanced capital requirements for captive insurers, aligning with international standards to ensure financial soundness and stability within the captive insurance sector.
Hong Kong’s captive insurance sector holds significant potential for growth, driven by several factors, such as its strategic location at the gateway to China and the Asia Pacific region, which positions it as an attractive domicile for captive insurers looking to access regional markets and tap into Asia’s economic growth. In addition, Hong Kong’s status as a leading international financial hub and its well-established legal and regulatory framework enhance its appeal to companies seeking to establish captive insurance entities. The territory’s emphasis on innovation and technology presents opportunities for captive insurers to leverage advanced risk analytics, digital solutions, and insurtech innovations to enhance operational efficiency and risk management capabilities.
Labuan
Labuan, Malaysia, has gained traction as a competitive captive insurance domicile in APAC, largely due to its favourable tax regime, regulatory framework, and increasing appeal to international businesses. Labuan offers a highly attractive tax environment for captive insurance companies, characterised by low tax rates. Profits are taxed at a flat rate or subjected to a maximum tax cap, providing significant tax savings compared to many other jurisdictions. The jurisdiction also offers a variety of tax incentives and exemptions to encourage the establishment and growth of captive insurance businesses, including tax exemptions on dividends, royalties, and capital gains for qualifying entities.
Labuan’s regulatory framework for captive insurance is known for its flexibility and responsiveness to the needs of businesses, offering streamlined regulatory processes. Labuan provides a straightforward and efficient regulatory process for setting up captive insurance entities, enabling quick and cost-effective establishment and licensing. Labuan tailors the regulatory requirements for captive insurers to their specific needs and risk profiles, thereby enabling greater flexibility in capitalisation, governance, and risk management practices.
The jurisdiction has experienced a steady increase in its popularity as a captive domicile due to several factors, including its strategic location. Situated in the heart of Asia, Labuan offers easy access to key markets in the region, including Southeast Asia, China, and India, making it an ideal location for companies with regional or global operations. Furthermore, Labuan boasts a diverse and dynamic business ecosystem, comprising a wide range of financial services providers, legal professionals, and support services, facilitating the establishment and growth of captive insurance ventures. Labuan’s reputation for regulatory stability and reliability enhances its appeal to international businesses, providing assurance and confidence to captive insurers and their stakeholders.
The Cook Islands
The Cook Islands, located in the South Pacific, have emerged as a notable captive insurance domicile, offering unique advantages. The Cook Islands’ strategic location in the South Pacific provides a tranquil and stable environment for captive operations. While geographically remote, the Cook Islands offer a jurisdiction with political stability, a robust legal system based on English common law, and a favourable regulatory environment for captive insurance.
The Cook Islands’ captive insurance regime has several special features, including a low statutory minimum capital requirement. The jurisdiction requires NZ$100,000 (US$61,000), whereas other key domiciles have much higher capital requirements for international businesses. This makes captive insurance more accessible for family offices.
The Cook Islands financial service industry has been operating since the 1980s and has an experienced and knowledgeable fiduciary services industry. The Cook Islands strictly enforce the rule of law, and its judges, often current or former New Zealand judges, apply Cook Islands law. The Cook Islands Financial Supervisory Commission (FSC) and the Captive Insurance Act 2013 (CIA) govern captive insurance in the Cook Islands.
Market demand led to the enactment of the CIA, which specifically aims to offer flexibility and administrative ease to organisations and individuals seeking to establish and manage a captive in the Cook Islands.
Trends and developments
In recent years, the insurance market has faced significant challenges, notably a contraction in coverage options for various modern day risks. As emerging technologies and new business models evolve, traditional insurance policies have struggled to keep pace, often excluding coverage for cyber threats, climate change impacts, and pandemics. This gap leaves businesses and individuals vulnerable to substantial financial losses.
Moreover, insurers are becoming increasingly selective in underwriting risks, driven by the need to maintain profitability amidst rising claims and uncertainties.
This trend not only highlights the necessity for innovative insurance products, but also underscores the urgent need for regulatory frameworks that encourage comprehensive coverage without compromising the sector’s financial health.
As businesses and family offices in the Asia Pacific region continue to recognise the value of captive insurance in managing risks more effectively, there will likely be a rise in the establishment of captives across various industries, including family-owned businesses managed by family offices.
Captive insurers may explore innovative solutions to address emerging risks, such as cyber threats, supply chain disruptions, and pandemic-related risks. Captives could also play a role in covering non-traditional risks, including environmental liabilities and intellectual property risks.
Captive insurers may leverage technology solutions, such as data analytics, artificial intelligence, and blockchain, to enhance risk assessment, underwriting processes, and claims management, leading to greater efficiency and cost savings.
With regulatory scrutiny increasing globally, captive insurers will likely prioritise governance, risk management, and compliance frameworks to meet evolving regulatory requirements and maintain financial stability.
Expanding into new markets is one opportunity for growth and innovation in the sector. Captive insurance domiciles in APAC, such as Singapore, Labuan, Hong Kong, and the Cook Islands, may attract more captives to cover risks in the region, presenting growth opportunities for the sector.
Another option could be the integration with family office services. Family offices managing the wealth of high-net-worth families and individuals may explore the integration of captive insurance solutions into their overall risk management strategies to protect family assets, manage insurance costs, and enhance financial resilience.
Finally, captive insurers may develop customised risk financing solutions tailored to the specific needs of family-owned businesses, providing comprehensive coverage for unique risks while optimising cost efficiency and control.
However, there are challenges and regulatory changes in the sector, including regulatory scrutiny, geopolitical risks, cybersecurity, and data privacy. Captive insurers may face increased regulatory scrutiny both domestically and internationally, resulting in more stringent regulatory requirements, reporting obligations, and capitalisation standards to ensure compliance and financial stability.
Geopolitical tensions and regulatory changes in key markets could also impact the captive insurance landscape, leading to uncertainty and volatility in the regulatory environment and potentially affecting captive operations and cross-border transactions.
In addition, as cyber threats continue to evolve, captive insurers will need to enhance their cybersecurity measures and data protection practices to safeguard sensitive information and comply with regulatory requirements, posing challenges to managing cyber risks effectively.
The captive insurance landscape in APAC is poised for growth and innovation, driven by increasing demand for risk management solutions, technological advancements, and evolving regulatory trends.
While opportunities abound for captive insurers and family offices, navigating challenges such as regulatory changes and emerging risks will require proactive risk management strategies and a commitment to regulatory compliance and best practices.
When setting up a captive, obtaining professional advice is crucial. Selecting an appropriate domicile is a key decision, influenced by regulatory environments, tax considerations, and the political stability of the location.
Expert advisors can provide valuable insights into the nuances of each jurisdiction, helping to optimise the benefits of a captive arrangement.
Equally important is the selection of reputable and reliable brokers and issuers. These professionals play a pivotal role in the structuring and management of the captive, ensuring that it meets the specific risk management needs of the business while adhering to legal and regulatory requirements.
Inadequate or improper guidance can lead to severe financial consequences and operational inefficiencies, making experienced advisors indispensable in this complex field.
