Progress in the Latin America captive market is attributable to improved knowledge and acceptability, according to Adriana Scherzinger, head of international programme business and commercial insurance for Latin America at Zurich Insurance.
Speaking at the virtual Bermuda Captive Conference, Scherzinger said there was an “initial lack of understanding of the concept of captives in Latin America with the perception that they were only suitable for large corporations”.
The panel, chaired by Eduardo Fox, consultant on corporate, private client and trusts for Latin America at Appleby, discussed how the COVID-19 pandemic and pre-existing hardening market have contributed to the expansion of captives, particularly in Latin America.
Scherzinger stated that the value of a captive has been emphasised by the hardening traditional insurance market, climate change, emerging risks and reinsurance technologies.
Even before the pandemic, there was a significant increase in the number of single-parent captives without cell captives in Latin America, from just under 5,000 in 2005 to a peak of 6,851 in 2015 and most recently recorded 6,650 in 2018.
Following this, increased activity by regional captive sector promoters and the efforts of regulatory and service infrastructure allowed Latin American businesses to utilise captive to their full advantage, in order to access the reinsurance market, reduce costs, gain flexible coverage and secure long term strategic financing.
Also speaking at the panel, Gabriel Rueda Barrera, general manager at Inversiones Y Consultorias Rueda Y Barrera, affirmed that 2020 has presented “brighter opportunities” for captives in Latin America as the pandemic has hit the traditional insurance industry with increased losses and expenses, as well as reduced premium income expectations, causing more firms to turn to captive structures.
Barrera noted that from this, the insurance industry as a whole has learned the importance of defining “loss” in an “all risks” policy.
He explained: “Therefore, underwriters must sufficiently understand the needs of their insureds, while the insureds must understand their policy wordings.”
It was predicted that from 2021, companies will be forced to consider their risk management programmes more seriously, either through an upgrade or adjustment, which will lead to increased activity in the captive field of middle market accounts.
The evolving key role of risk management, according to Barrera, requires buyers “to take a more professional approach by assessing their actual exposure to loss through estimated maximum loss scenarios, as well as set appropriate limits of retention, align business interruption insurance with business continuity programmes, and establish aligned protocols for recovery and contingency planning”.
While companies must now pay closer attention to their risk management programmes, Barrera emphasised that this is “a time of opportunity” to learn from corporate business continuity practices. He recommended that companies should be more creative when insuring their assets, and ensure that business interruption is fixed and adjusted accordingly to underlying risks to better prepare themselves for other pandemic-style risk events.
As companies look to risk management to ease their challenges, Latin American legislators and regulators are becoming more sophisticated in setting out a level playing field, according to Javier Ordo?n?ez-Namihira, partner of the tax and wealth management group at Baker McKenzie.
He noted that Latin American governments are taking a substance-over-form approach with general anti-avoidance rules (GAARs) to establish clear rules to taxpayers to define substance in the view of tax authorities. This is currently being codified for the first time in Colombia, Peru and Brazil, with Mexico recently introducing GAARs to ensure captives are formed based on business reasons rather than tax reasons.
In this instance, business reasons are defined as objectives such as risk retention, actual risk transfer and asset protection. With any loan structure established through a captive, Mexican captive owners must memorialise the business reasons that led to such lending.
Ordo?n?ez-Namihira also highlighted that many Latin American governments are moving towards the promotion of transparency and exchange of information, particularly Colombia, Peru and Mexico.
Again, Mexico also recently introduced transparency measures and reporting obligations to disclose information about “reportable schemes”, similar to the Organisation for Economic Co-operation and Development (OECD) guidelines regarding mandatory disclosures. Effective 1 January 2021, the measures define tax benefit as reduction, avoidance or deferral, with tax advisors as the primary responsible party.
Finally, Ordo?n?ez-Namihira noted: “The focus of Latin American governments on anti-deferral rules to prevent the accumulation of wealth without sufficient coverage. Unlike Chile and Peru, Brazil does not yet have these rules in place. Overall, the efforts of Latin American governments have the common objective to increase tax collections.”