Farah Jaafar, CEO of Labuan IBFC Inc, discusses trends in cell formations and approaches to holistic risk management in the domicile of Labuan IBFC ahead of the 2021 Asian Captive Conference
What are the most significant factors driving the growth of Labuan IBFC as a captive domicile?
Labuan IBFC offers Asia’s widest range of insurance, reinsurance and self-insurance structures — in fact, we have the most comprehensive toolbox of self-insurance structures and solutions in the region, both in terms of the conventional and shariah-compliant versions. To date, Labuan IBFC is still the only jurisdiction in Asia that offers a protected cell company (PCC) as part of a risk management solution.
A little less-known fact is that we also have the largest and deepest insurance and risk management ecosystem in Asia, with more than 220 licence holders supported by professional corporate service providers and international banks.
Holistically, Labuan IBFC offers an ideal location for captive set-up. Our leadership in captives has been entrenched by our approach in developing the jurisdiction’s self-insurance sector, which is founded on generating awareness with the regional risk management community and working closely with industry groups.
Having great intermediaries has been beneficial, and fostering a close working relationship with the Labuan International Insurance Association has been key. The hardening market, greater awareness, COVID-19 and the characteristics of the jurisdiction have created the perfect storm for our growth. Additionally, one cannot overlook that Labuan IBFC provides a cost-efficient operating base to create economic substance such as administration and operational expenses.
What trends have you observed around the formation of cell captives in Labuan IBFC?
While cell captives are typically set up by corporations with exposures to specific risks, especially those difficult to get traditional commercial cover, there are also corporations that are aiming to consolidate risk exposures for a holistic view of risks and transparency of risk costs and returns via a pure captive.
We envisage cells as “training wheels” for pure captives, as it gives corporations a taste of the benefit of self-insurance. Having said this, like everything else in wholesale financial and risk intermediation, there is no one-size-fits-all solution. Cells, though, do provide quick cover options, especially as we no longer require approval for the setting up of cells, merely a notification to the regulator within 14 days.
We are seeing a trend in medium-sized corporations starting to explore and consider captives as part of their risk management solution, more so now as it is more cost-efficient in setting up via a cell. With the current hardening market and the COVID-19 pandemic, this has undoubtedly accelerated the setting up of cell captives for specialised risks, which would have otherwise been traditionally uninsurable — for example, we have seen a lot of cyber risk, directors and officers liability, and travel cover being placed in cells.
What are some of the key factors to consider in order to set up a cell with confidence? Do these factors differ when setting up a traditional captive?
Whatever the circumstances or situation may be, the choice of service provider is key. That said provider must be competent and familiar with the management of cells as well as the wider landscape of the insurance industry. This requirement applies to either the core provider for the protected cell company or the master rent-a-captive, depending on the option chosen.
Other factors worth considering include paid-up capital, professionalism and servicing elements. The relationship with the core is key, as the core will have to agree with the level and scope of risk being placed in the cell. There is, to a certain degree, an underwriting element in the operations of the core vis-à-vis the cells.
Do you think cells are seen as a short-term solution by new market entrants? Is this feasible or sensible? And what about solvency?
In Labuan IBFC, it generally takes two weeks to set up a cell operationally. Depending on the risks within the cell (whether long-tail or short-term) and if the risks have expired their term, then closing down a cell can be done almost immediately. Whilst cells as a corporate structure are easy to set up, the reinsurance contract inputted into the cell still requires a run-off like all other insurance contracts.
However, it is worth noting that there is no limit on the cover that can be taken at the cell, which is relatively similar to a pure captive. This ultimately depends on the appetite of the core overall and the solvency of each cell individually. Hence, the solvency ratio is managed at the core regarding the reporting to the regulator. In Labuan IBFC, the solvency statement of the core is required to be reported to the Labuan Financial Services Authority twice a year.
Is it a reasonable base assumption to consider a cell as a ‘trainer’ facility before moving to a pure captive solution? How feasible is this conversion?
It is possible for a cell to convert into a pure captive the moment it achieves economies of scale to set one up.
It could also be due to the changes of the corporate’s risk profiles over time, which would then require a more holistic review of its risk management strategy. For a more holistic approach to strategic risk management, there is no real alternative to a pure single owner captive.
Alternatively, we have seen instances where only a couple of new lines or risk areas necessitate cover, as some users prefer to set up only a new cell or two. At the end of the day, it all largely depends on the strategic risk management practices within the organisation.
In Labuan IBFC, the conversion from a cell to a pure captive is considered a new application. This is because a pure captive is a new legal set-up (whereas a cell is not), so proper due diligence is required. That said, the process may be relatively simple as the cell already has a track record in the jurisdiction. In such cases, the approval process will normally take a month.
