Although Canada, and British Columbia in particular, has hosted captives for some time, specific legislation relating to the formation of captive entities was not enacted until 1987...
Although Canada, and British Columbia in particular, has hosted captives for some time, specific legislation relating to the formation of captive entities was not enacted until 1987.
Called the Insurance (Captive Company) Act, it allowed for the construction of pure captives, association captives and sophisticated captives.
This flexible legislation required no specific solvency ratios, allowed easy access to reinsurance markets, gave lower operating costs relative to other domiciles and incurred no federal excise tax. Although the capital requirements in British Columbia are relatively low at around $200,000, there are no additional special tax rates.
The Canadian Captive Insurance Association (CCIA) has primarily been involved with the development and maintenance of British Columbia’s captive domicile, though it does deal with companies in the rest of Canada and internationally. The industry is promoted in locally through brokers and consultants advising their clients as to the best method of financing risk.
According to Neil MacLean, partner at Guild Yule LLP, while the number of captives in British Columbia “has remained fairly constant over the history of the legislation coming into effect”, additional and significant growth is anticipated in the near future by certain members of the industry.
Angela Wright, chair of the CCIA, comments: “We expect a significant increase in the number of captives over the next 12 months, with the number of captives at least doubling. When we are eventually able to get changes to the legislation to, for example, allow for protected cell captives and other structures, we expect to see some further development.”
British Columbia’s Financial Institutions Commission (FICOM) is organised to oversee the insurance and captive industries. FICOM, along with Canada’s federal regulatory agency, are members of the International Association of Insurance Supervisors (IAIS) and have enhanced their regulatory frameworks and solvency standards to meet the association’s criteria.
Effective 1 July, the Jobs, Growth and Long-term Prosperity Act brought into force amendments to the Canada Labour Code that requires every federally regulated employer providing benefits under a long-term disability plan to insure it on a go-forward basis to protect employees, should the employer go bankrupt.
This amendment could affect British Columbia-domiciled captives and other Canadian captives of federally incorporated companies. It could also result in the creation of additional captives either in British Columbia or elsewhere.
This is an example of how legislation in British Columbia, while not aiming to become a world-beater, fosters responsible growth. Louise Fung, managing director of Aon Risk Solutions in Vancouver, explains: “British Columbia is an attractive domicile in terms of appropriate, but not burdensome legislation. Capital requirements are not complicated, rather based on the net exposures underwritten and subject to a minimum requirement of $300,000.”
Given the size of British Columbia’s captive industry, FICOM and the superintendent’s office are, according to Fung, “approachable and supportive of the captive industry’s desire to grow”. The superintendent’s office also provides support to the CCIA and speaks on behalf of the regulatory body at the annual Canadian Captive Conference.
Aside from dealing with regulatory change, another potential challenge for British Columbia’s captive industry has to do with treaties between Canada and a number of other domiciles.
Fung comments: “Those types of treaties generate efficiencies, but we encourage captives to evaluate the cost of operating a British Columbia captive when bearing in mind the potential savings available for qualified captives under the International Business Activity (IBA) programme.”
Although British Columbia’s captives are subject to the same tax regime as other Canadian insurers, this is not the case when they write international business.
Captives writing international business qualify under the IBA programme and, as such, net income derived from that business is eligible for a full provincial income tax refund.
This means that net income derived from international underwriting is subject to federal income tax at approximately 15 percent.
Despite measures such as these, there are many who feel that British Columbia will never be able to reach the dizzying heights enjoyed by states such as Vermont, and that is a case of logistics rather than indifference.
Michael Mulhern, secretary and treasurer at CUPP Services, comments: “I would say British Columbia’s captive insurance industry is nowhere near the level of organisation, visibility, and sophistication as in some US states, Bermuda and others. I think that’s simply a matter of economics rather than opportunity. British Columbia has a small population, which means we don’t have access to a massive industry or a proliferation of large conglomerates.”
“Healthcare in Canada is provided by the government so we don’t have huge health and benefit insurers like in the US. Canada as a whole is known for not being highly litigious, so it is not a risky place to do business and the insurance companies that do business here are competent and competitive, which keeps insurance buyers from clamouring for alternatives.”
Regardless of the state’s modest ambitions and claims that growth is not a priority, it would appear that there are many in British Columbia that are keen to expand upon the groundwork that has already been set.
Fung says: “Looking ahead, the CCIA is looking for opportunities to work with several other provincial insurance regulators to ensure their acceptance of British Columbia’s licensed captives.”
