Captivating proposals: QFC Proposals on Captives and Managers

Pursuant to the recent shift in the Qatar Financial Centre's ("QFC") strategic focus toward becoming a captive insurance hub for the region, the QFC Regulatory Authority ("QFCRA") in early April 2011 issued two consultation papers. The consultation papers set out the proposed draft rules in respect of captive insurance companies, draft regulations for captive insurance management, and proposed reforms to the insurance intermediary regime in the QFC. In formulating the consultation papers, the QFCRA has conducted a review of other international jurisdictions to identify currently employed accepted practices and regulations. Each consultation paper also set out the reasoning of the QFCRA in respect of its proposals, followed by questions designed to evoke responses from market stakeholders. This article focuses on the proposed changes to the captive regime. A further update will follow shortly looking at the proposed new intermediary regime.

Words and terms not defined in this article have the meanings provided in the QFC Application and Interpretation Rulebook ("INAP").

Consultation Paper 2011/01 focuses on the proposed rules for the captive insurance regime in the QFC ("CP1"). Currently the QFC recognises the following 3 classes of captive insurers:

Class 1: A single parent company that writes only contracts of insurance in respect of risks related to their owner and/or affiliates. It is a form of self-insurance risk management tool of its owner (minimum capital: US$150,000).

Class 2: A captive that can write up to 20% of gross written premium from third party risks (i.e. unrelated business) in addition to the risks of their owner and/or affiliates (minimum capital: US$1 million).

Class 3: This class is normally a multi-owned insurance company writing only the risks of its owners and/or affiliates, usually within a specific trade or activity. For example, a motor vehicle trade association that is self-insuring. This captive insurer is used as a risk management tool of its owners and/or affiliates (minimum capital: US$250,000).

The QFCRA in CP1 proposes to retain the three current classes of captives whilst adding a fourth "discretionary" category designed to address less conventional captive structures. The risk allocated in respect of a category four captive would be determined at the discretion of the QFCRA, but the minimum capital requirement for such entities would likely be US$1 million.

The QFCRA also indicates that Letters of Credit ("LoC") will be permitted as a form of eligible capital for captives in the QFC. The LoCs must have the following characteristics:

Unconditional and irrevocable;

Include no subordination clause;

Are legally enforceable in the QFC or equivalent jurisidiction;

Can not be cancelled or amended without the consent of all parties;

Are for a fixed amount; and

Are renewed annually.

CP1 also proposes to lift the previous restrictions in respect of protected cell company formation to permit all classes of captives to form protected call companies.

Finally, CP1 sets out the permissibility of existing foreign captives to re-domicile to the QFC.

Consultation Paper 2011/02 addresses the proposed rules in respect of captive insurance management and insurance mediation in the QFC ("CP2"). The QFCRA in CP2 proposes to introduce a new Insurance Mediation Business Rulebook ("IMEB"), and to revise the definition of certain regulated activities in order to clearly distinguish between captive management and insurance mediation, as each will have a different risk profile. CP2 sets out the following definitions:

“insurance mediation” [consists of] the current activities of advising, arranging and dealing in contracts of insurance, as well as the inclusion of a new activity of assisting in the administration or performance of contracts of insurance; and “captive insurance management”, which is defined as the administration of, and exercise of managerial functions for, a QFC captive insurer, and includes the administration of contracts of insurance for the insurer.

The creation of new rules in the IMEB will enable the QFCRA to introduce different requirements for insurance intermediaries and captive managers without affecting the current requirements that apply to banking and investment business. However the other more general rules relating to approved individuals, anti-money laundering, and controlled functions will still apply to all regulated entities.

The QFCRA also proposes that captive managers be categorised as a hybrid of PIIB categories 3 and 4, whilst recognising that the existing base capital requirements of either PIIB category 3 or 4 are too high for captive managers. Accordingly the QFCRA has proposed that the minimum capital requirements for such entities be set at US$50,000. Current base capital requirements for PIIB category 4 Firms is US$250,000 and US$500,000 for PIIB Category 3 Firms.

Furthermore, CP2 addresses certain weaknesses in the current client money protections that are provided pursuant to ASET, particularly in respect money related to insurance business. The QFCRA therefore proposes that the client money requirements in respect of insurance intermediaries be relocated from ASET to IMEB, and that such client money requirements not apply to captive managers. The draft IMEB Rulebook sets out full details of how client money for insurance business is to be dealt with.

Finally, the QFCRA proposes to increased the current limit of professional indemnity insurance for insurance intermediaries (and captive managers) from US$500,000 for a single claim and US$1 million in aggregate, to US$1 million for a single claim, and US$1.5 million in aggregate. Current PII rules in the CTRL will also be migrated to the IMEB.

After receiving comments in respect of the consultation papers, the QFCRA intends to incorporate the feedback from market stakeholders and other interested parties into the draft IMEB rulebook. The IMEB is expected to come into force in July 2011.

This article will be followed up shortly with a review of the new IMEB Rulebook proposals and comments on the new insurance intermediary regime generally.

The above is from Michael Earley, Senior Associate, Clyde & Co, Qatar