Puerto Rico has one of the largest insurance industries in Latin America...
Puerto Rico has one of the largest insurance industries in Latin America. According to annual reports from the Office of the Commissioner of Insurance, total written premiums reached $10.7 billion in 2013, 72 percent of which was in health and disability.
With emerging markets in Latin America continuing to expand, Puerto Rico offers a unique opportunity for international insurance companies to capitalise on its political status. As an unincorporated territory of the US, the banking industry is regulated by US federal system and protected by Federal Deposit Insurance Corporation (FDIC). Despite this, taxes are imposed by Puerto Rico authorities and not the Internal Revenue Service (IRS).
Tim O’Connor, managing principal at Risk Financing Alternatives, LLC, comments: “Certainly Puerto Rico’s location and culture, as well as its bilingual populace, makes it an attractive domicile for both the US and Latin America. As a US commonwealth, it shares the US legal system, which is an important consideration. The tax structure initiated in Puerto Rico under Law 399 and Act 98 compares very favourably with most other domiciles. Additionally, Puerto Rico is recognised by both the National Association of Insurance Commissioners (NAIC) and its South American counterpart ASSAL. All this gives great confidence to groups looking to place their captives in Puerto Rico.”
Not new to captive insurance business, Puerto Rico is home to more than 100 US captives and is rapidly expanding into Latin American countries, with new legislation on hand that incentivises exportation of international insurance products by offering attractive tax exemptions and legal protection under both the US and the Puerto Rican constitution.
Unprecedented growth in Puerto Rico’s captive insurance arena during recent years has been a main driver for legislative projects designed by the Office of the Commissioner of Insurance to improve opportunities for US captives.
Other laws designed to attract captive managers and service providers into the island, have also helped generate international interest for the jurisdiction.
While taxes seem to be one of the most important factors, captive owners in Puerto Rico also benefit from a well-developed banking and investment industry. “Being in a US jurisdiction like Puerto Rico will allow the captive owner to make investments through registered representatives and have access to both domestic and international securities, just like they do in Wall Street. Not only there is a knowledge of US laws and regulations when it comes to investments but to local and international statutes as well,” adds Manuel Diaz Collazo, senior vice-president at Santander Securities.
“Here in Puerto Rico we have the capabilities and technological advantages to compete with any other major jurisdiction. In terms of brokerage firms, financial institutions and registered personnel, we have the same controls and regulations that the US delivers plus the local oversight of the Puerto Rico Commissioner of Financial Institutions. The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) oversee the suitability of security transactions and the qualifications of registered representatives that work for brokerage firms in Puerto Rico.”
All international insurers enjoy a $1.2 million exclusion from Puerto Rico’s tax regime. Net income that exceeds the $1.2 million mark has a preferred 4 percent tax rate, which is an attractive figure considering the island’s political and structural ties with the US. This means that a large group of US captives will pay no taxes at all on their earnings under the Puerto Rico jurisdiction. Benefits under this tax treatment will be assured over a period of 15 years and it is renewable for 2 additional periods.
While Puerto Rico’s captive growth has mainly come from US companies re-domiciling from other offshore jurisdictions, government officials as well as captive managers involved in Puerto Rico believe that a strong market will eventually be developed with Latin America.
“A large area of opportunity for Puerto Rico lies with Latin America. Though the notion of captives has taken root in Latin America, its potential far exceeds actual progress in forming captives for Latin American companies. There are many reasons for this, including restrictive trade laws in some Latin American countries, but Puerto Rico is well positioned I believe, to attract this business when it develops,” says O’Connor.
From a US standpoint, Puerto Rico offers an attractive opportunity for captive managers to set up operations in Puerto Rico. Ryan LLC in particular has set up a number of captives in Puerto Rico and has worked closely with the insurance commissioner to help update legislation and promote the domicile internationally.
Ken Kotch, principal at Ryan LLC, states: “Since Ryan was introduced to Puerto Rico’s department of insurance, we have invested in a physical office and a permanent agent in San Juan, which is a component part of being a captive manager there. We have also sponsored a Class 3-agency arrangement in Puerto Rico.”
“At Ryan we have 85 clients right now, some of which are based in other jurisdictions, that have selected Puerto Rico as the place to establish their insurance facility and on a bona fide basis, and transact property and casualty insurance.”
While the island does represent an interesting opportunity for both US and Latin American captives, it is certainly not a jurisdiction for every type of captive.
Particularly, Puerto Rico imposes a minimum capital requirement of $500,000 for pure captives, which is a figure much higher than other offshore jurisdictions.
This requirement, according to the Office of the Commissioner of Insurance, has been a long-term strategy to avoid the regulatory implications of having under-capitalised insurance companies.
Local captive managers also view these requirements as a positive element to help protect the jurisdiction’s reputation. “Puerto Rico’s higher capitalisation requirement does limit the scope of captives that wish to enter into the jurisdiction, but it also serves as a tool for screening possible prospects and helps us assure that we’re attracting legitimate insurance operations,” comments Howard Ho, CFO at MGH Advisors.
However, an alternative to Puerto Rico’s capitalisation requirement lies within protected cell arrangements that already play an important role in the expansion of captives in the island. Puerto Rico legislation allows for a parent company to setup under a special licence (Class 3) that allows it to rent cells to interested parties. By doing so, the parent company absorbs the capitalisation requirement and therefore allowing smaller captives to domicile in Puerto Rico.
Although not new to the industry, protected cell arrangements are quickly gaining popularity in Puerto Rico and opening doors for smaller sized captives to do business in the jurisdiction.
“This is a phenomenon not unique to Puerto Rico. In the US, the captive industry has matured for single parent captives. Most of the large corporations and other large entities that a captive makes sense for have already formed captives.”
“The growth area for captives is in small- to medium-sized organisations whose segregated or protected cell structure makes better economic sense due to its lower operating and capital costs. These captives are frequently set up under the 831(b) structure for which risk sharing to achieve the IRS required risk distribution can oftentimes be easier achieved in a protected cell arrangement,” adds O’Connor.
As the captive insurance industry continues to expand into new areas, other domiciles will also continue to develop their legislation to attract new business and ultimately stay competitive.
While the Office of Commissioner of Insurance of Puerto Rico’s most important task will be to maintain updated legislation in line with the industry, local service providers also have the responsibility of positioning Puerto Rico’s legislation internationally and serving as facilitators to new projects.
“We cannot expect for captives to find out about Puerto Rico on their own. As any other business, we must be consistent in promoting Puerto Rico and need to take full advantage of every opportunity to expose the benefits of our legislation, whether it is a booth at a conference or reaching out to other captive managers. We need to take the first step,” says Jose Matos, president of MGH Advisors.
What exactly is ahead of the road for Puerto Rico’s captive arena? The jurisdiction’s success will depend on how well both Puerto Rico regulators and service providers can work together to continually design new opportunities for the industry while also focusing on expanding the island’s professional workforce in related areas.
O’Connor states: “As always, nothing breeds success like success. Puerto Rico is relatively new to the captive domicile arena. As the unique advantages provided by Puerto Rico are better understood, more will gravitate to it as a captive domicile.”
“Work needs to be done to expand the infrastructure of service providers in the area of captive management, auditors, bankers and attorneys with captive expertise. As the domicile grows, these services will expand organically. In the meantime, there are plenty of service providers willing to bring their expertise to Puerto Rico.”
