Guilden Gilbert of CG Captive Managers and Rayon Brown of Nichol & Co discuss the current market conditions of the captive industry in The Bahamas, the regulatory environment and the post-COVID outlook
With stretching white sand beaches, plunging blue holes only accessible by deep sea divers, an uninhabited island filled with nothing but swimming pigs, and a curious history as a pirate republic, you could be excused for mistaking The Bahamas for paradise.
Aside from this, however, the islands are also recognised as a distinct captive domicile that is ready to bounce back after the pandemic.
The western islands of the tropical archipelago are situated just 50 miles off the coast of south Florida. This close geographical proximity allows the islands to enjoy business advantages with the US and Canada, as well as leading economies in Central and South America.
Frequent collaboration between the public and private sectors promotes regulatory flexibility and a business-friendly environment through structures such as The Bahamas Financial Services Board (BFSB).
With more than 80 years of financial services experience as a domicile, The Bahamas is also helped by the competitively high cost of conducting insurance business in onshore and other offshore jurisdictions, as well as stringent tax laws and regulatory requirements.
The Bahamas is particularly recognised as a leading captive domicile, a status which is boosted owing to its mature asset and wealth management industry, financial and legal infrastructure, availability of financial planning products, and an established domestic insurance market.
The success of The Bahamas as a captive domicile is affirmed by Rayon Brown, consulting actuary at Nichol & Co and director of Nassau Captive Management Services.
He describes the current market conditions as “very good; we have been busy”.
“The Bahamas has been a leading financial centre for a long time and the market is now realising that we also have a lot of resources in the insurance sector — including actuaries, accountants, lawyers, and so on,” Brown continues.
“The same clients that have wealth management and family office facilities here realise that they can also get risk management services in this domicile. The facilities found in The Bahamas are among the very best in the region — including two resort facilities representing multi-billion investments.”
Brown notes that the landscape of the captive industry in The Bahamas attracts “a lot of employee benefits business, or any type of business that leverages our experience in asset management — for example, unit-linked or variable annuities”.
He adds: “I am an actuary by profession, so the business we attract tends to be a bit more technical in nature, such as reinsurance to transfer longevity risk to the capital markets.”
Conversely, Guilden Gilbert, CEO of CG Captive Managers, outlines: “As a captive manager, our target market is the smaller-sized companies that would sit below where Bermuda would be considered an option due to minimum annual management fees.”
Regulatory focus
The regulatory environment of The Bahamas is perceived to be beneficial for captive owners; legislation and regulatory practices within the domicile have been updated significantly in the past two decades to incorporate innovative insurance products and solutions that are otherwise excluded by increasingly restrictive regulation in onshore jurisdictions.
Brown says: “The legislation was revamped about 10 years ago. The regime we have in place provides prompt, secure and flexible services to owners and participants. We have been able to blend our experience in asset management and hospitality to provide top class services for clients.”
Looking comparatively with other established captive domiciles, application fees in The Bahamas are relatively low or in-line with other jurisdictions, as are annual licensing and annual registration fees, as well as competitive minimum capital requirements with other jurisdictions (B$100,000 for general insurance business and B$200,000 for long-term insurance business).
Compared to other jurisdictions with a similar infrastructure and economy, The Bahamas has significantly lower capital requirements than Bermuda and Vermont, and is broadly in-line with Guernsey, Barbados and the British Virgin Islands.
Regulatory oversight in the domicile is conducted by the Insurance Commission of The Bahamas (ICB), while the registrar of insurance companies is responsible for approving captive managers.
Under the mandate of the ICB, the independent regulatory agency is authorised to survey the islands’ insurance market, provide advice to the Minister of Finance on insurance matters, and promote fair insurance management and business practices.
The ICB also oversees the administration of the Financial Transactions Reporting Act, the Insurance Act and the External Insurance Act. Enacted in 2009, the latter piece of legislation asserts that captives must be registered as external insurers, with annual reviews to ensure solvency requirements continue to be met. Alternatively, once an international business company has been incorporated it can then be registered as a segregated accounts company.
When doing business in The Bahamas, there are three key corporate structures: domestic business company; international business company (which is the most widely used for offshore operations); and segregated accounts company (a separate legal entity can create cells in which the assets and liabilities of each segregated account are separate from those of others).
In addition, under the law captive insurers must submit annual audited financial statements to the ICB after the fiscal year-end. In terms of due diligence, under the law captive insurers must have at least two directors as well as a resident representative.
Discussing the advantages of the regulatory environment of The Bahamas, Gilbert highlights: “The regulator is exceptionally easy to work with. The goal is to grow the captive market, and for that to happen, the regulator must be amenable and flexible, which they are.”
In terms of tax, The Bahamas signed a tax information exchange agreement (TIEA) with the US in 2002 — as promoted by the Organisation for Economic Cooperation and Development (OECD) — to promote tax transparency and the effective exchange of tax information between the two jurisdictions.
Recognised for its commitment to international tax transparency, anti-money laundering and counter-terrorist financing initiatives, The Bahamas was placed on a whitelist by the OECD of jurisdictions that substantially implement international tax standards (despite being placed on the EU’s ‘greylist’ in March 2019 as a potentially non-cooperative tax jurisdiction).
Although a ‘tax-neutral’ environment for business — meaning there is no direct taxation on capital gains, corporate earnings, personal income, inheritance or dividends — the taxation of captives is according to legislative anti-avoidance provisions in many onshore jurisdictions. For example, if there is US ownership in a captive, it is likely to be subject to US tax rates through the 953(d) election, while an offshore captive will pay federal excise tax.
Moving forward
As the world begins to cautiously navigate post-pandemic conditions, how did COVID-19 affect interest in alternative risk financing in The Bahamas?
Gilbert identifies that there were certainly troubles for captive management firms based in the domicile: “For us, as a captive manager, soliciting new business has been tough with COVID-19 as travel and conferences have been stymied.”
“Travel has been restricted and related conferences have moved to online, which for us reduces the marketing we can do. We prefer face-to-face interaction with potential clients because marketing in the captive space can cause a small entity like us to go unnoticed,” he explains.
Brown affirms that travel restrictions posed a setback to clients, but also notes the efficient reaction of bodies on the islands: “Our regulators reacted quickly to allow virtual meetings; we also have very good banking and communication infrastructure, so there was very little impact.”
Looking at the emerging risks that have been identified in the pipeline for the captive industry, Gilbert names the cannabis, hemp and CBD industry as a noteworthy new segment and target for captives.
