With the recent growth of Latin American economies there has been a corresponding rise in interest in alternative risk transfer programmes...
With the recent growth of Latin American economies there has been a corresponding rise in interest in alternative risk transfer programmes. As a result, many regional firms are now well-positioned enough financially to consider some form of self-insured retention, in combination with traditional risk transfer options, and are eager to improve their understanding of risk management and the financial benefits of using captives.
Maria Escobar, senior vice president and head of captive solutions for Marsh Latin America, comments: “As companies grow, they are branching out, becoming ‘multi-Latinas’. Clients have become aware of the benefits of a captive, including the option to write risks that the insurance market is either not willing or unable to cover (or will cover only with limited conditions).”
These risks could be those that are difficult or too highly rated to cover in the market such as malicious tampering damage or credit risk.
Not only are Latin American companies expanding their operations worldwide, but the risk management culture in the region is also becoming more mature. Many of the industries in Latin America are becoming interested in captives, including manufacturing, financial, mining, energy, utilities, and aviation. Escobar explains: “As long as a company has a risk profile to manage and the opportunity to optimise its risk financing strategy, it can benefit from a captive solution.”
Les Boughner of Willis’s global captive practice, says: “There tends to be more property risk than casualty being written but that is typical in a non-US captive. As many of them are large natural resource companies, some coverage is designed around raw materials being harvested. For instance, a pulp and paper company is investigating using their captive to reinsure or cap their exposure to forest fires.”
Other lines for such a company could also include transportation, bonds, life and product liability.
Some clients are even looking to benchmark their programmes and use of captives against other companies worldwide that are in the same industry, according to Boughner. While competition with global rivals may still be somewhat premature, the simple fact that regional insurers are dreaming beyond Latin America is a testament to their ambitions.
All of the countries of Latin America have different insurance legislation for non-admitted coverage and reinsurance. The local markets can provide limited support but, where allowed, reinsurance is available from international reinsurance companies that are able to provide abundant capacity. As Boughner explains: “In many cases, the sole reason that some companies choose to form a captive is to access this reinsurance market.”
Rating agency A.M. Best recently revised its outlook on the global reinsurance industry to negative from stable, but, despite fundamentals in the US and European markets trending the wrong way, capital continues to be drawn in.
More importantly, this recent flurry of capital movement has triggered behavioural changes by the market’s traditional players, with more company names appearing for the first time on reinsurance programmes in what the report terms as “unusual locations” such as Latin America.
There are several domiciles specifically targeting Latin America—Barbados, Panama, Puerto Rico, Bermuda and the Cayman Islands—all of which have established captive legislation and are equipped to regulate captives with strong support from local service providers.
Despite this, the consensus remains that it is Bermuda that seems to have the edge in terms of the amount of formations for which it is responsible.
Boughner says: “While there is no single reason for this, it could well be that Bermuda is the largest domicile and has a local reinsurance market that is very comfortable reinsuring captives.”
Escobar agrees: “The main domicile for Latin American captives (single parent) is Bermuda. There are several reasons for this but the most important are the domicile location, regulation, reputation, costs and the tax agreements Bermuda has signed with many Latin American countries.”
Domicile selection depends on many factors that can vary from country to country, especially when it comes to regulations related to ‘black list’ domiciles and the tax information exchange agreements signed with each country and the captive domiciles.
Besides Bermuda, there are also other domiciles used by Latin American captives such as the Cayman Islands, Switzerland, Luxembourg, and even Singapore.
“One of the biggest challenges in Latin America is to front a captive, the reason being: if the captive is not rated and registered in the country where the policy has to be issued, you need to have a double fronting (local carrier plus a reinsurer registered in the country) to place the risk into the captive. This is an extra-cost that has to be considered in the analysis and in some cases is a deal breaker,” says Escobar.
Although the global insurance companies have a presence in Latin America, limited options remain to front captives.
This is dependent on the internal policies of each individual company and, in some cases, the local or global relationship with the specific client.
Local regulations in countries such as Brazil, Argentina or Ecuador, for example, are more restrictive in terms of allowing the local insurance market to place local risks in the international market. The penalties in certain countries range from fines to prison time.
Boughner adivses to “view your captive as a dynamic financial tool that plays a vital role in your risk management strategy”.
“It is much more than an insurance company. It is also integral to review that strategy annually.”
Some companies, however, have not let the varied regulations and potentially stringent restrictions put them off. On 4 July, Switzerland-based insurer ACE announced the purchase of the large corporate property and casualty insurance business of Brazilian insurer Itaú Seguros for almost $700 million.
This was not an unsubstantial purchase as, in 2013, Itaú Seguros’s commercial business generated approximately $1 billion in premiums.
ACE also implied that, once the appropriate Ts have been crossed and the Is dotted, Latin America will represent approximately 14 percent of its total premiums—compared with around 8 percent of total premiums in 2013—making ACE one of the major players in the region.
Escobar says: “In the years ahead, the adoption of captives as an alternative to traditional insurance market solutions will likely increase, and the strategies used by those captives will likely become more sophisticated. Many Latin American companies should consider the role captives could play in their risk management programmes.”
“The main challenge for managers and shareholders is to fully understand the concept of a captive and the benefits they provide. I would advise a parent looking for a captive to understand all the benefits and look at the captive as a medium- to long-term strategy linked with the risk management objectives of the company.”
