In March 2015, our beautiful island country Vanuatu was hammered by tropical Cyclone Pam. A category five cyclone, it was the largest in recorded history to ever hit our South West Pacific Islands.
In March 2015, our beautiful island country Vanuatu was hammered by tropical Cyclone Pam. A category five cyclone, it was the largest in recorded history to ever hit our South West Pacific Islands. Port Vila, our capital, came through relatively unscathed, an endorsement of our sturdy infrastructure. Communications with our offshore clients were not disrupted and it was business as usual.
The event did, however, provide a stark reminder of the impact that a ‘one-off’ event can have. It also provided a dramatic illustration of the dangers that can be avoided by critically examining your risk protection programme on an ongoing basis. An appropriately tailored captive insurance programme should be an essential part of that thought process. Incorporating your capital insurance entity in Vanuatu presents a number of benefits and advantages.
Since its beginnings as a financial centre in the 1970s, Vanuatu has been at the forefront of commercially driven legislative reform. Whether you are seeking to establish a captive programme or converting from another jurisdiction, we can facilitate the process easily and seamlessly.
We are an accessible, vibrant and reputable domicile. Our regulators and legislators work with our licensed captive managers to enable them to achieve their client’s objectives. Our captive clients benefit from this proactive approach.
Flexibility for captives
Vanuatu’s captive legislation has been purposely designed to offer a full suite of insurance options including incorporated insurance companies and incorporated and protected cells.
Capital requirements and reporting systems are similar to other well regulated offshore jurisdictions. As in other jurisdictions, resident insurance managers, licensed by the regulator, are required to manage captives.
A significant feature of Vanuatu’s legislation is its ability to deliver flexibility while understanding the challenges faced and outcomes sought by the captive insurance industry.
Although flexible and accessible, our regulators must be satisfied that the reputation of any new applicant for a licence will add to the credibility and integrity of our financial service industry.
It is this adherence to prudent regulation that has maintained the confidence of our international client base in Vanuatu as a business-friendly environment. Minimal compliance costs provide an accessible and stable platform from which to launch any captive insurance programme. Some of the captive options are detailed below.
PCCs and ICCs
Until recently, the path most travelled by risk managers and their service providers was to undertake a feasibility study on incorporating a separate parent captive company with the consequence that the protected cell company (PCC) and incorporated cell company (ICC) structures were overlooked as options. Given that risk managers face the ongoing challenge of keeping their corporate captive structure ‘fit for purpose’, it is surprising how frequently PCCs and/or ICCs are excluded from a risk manager’s potential arsenal.
There are two possible reasons for this trend. For one, not every jurisdiction has a regulatory environment that is conducive to the effective operation of PCCs and ICCs. However, even in those jurisdictions that do, risk managers and their advisors may not be fully aware of the potential uses a PCC or ICC has, beyond the most conventional of scenarios.
Vanuatu and the professional advisors that operate within it are attuned to these issues.
For captive owners and sponsors, PCCs and ICCs can offer significant economies of scale: (i) a single board of directors; (ii) consolidated capital, accounting, auditing, management and reporting protocols; (iii) reduced lead in time to establish the captive; and (iv) reduced client management time, energy and capital.
Financial reporting around cell structures can present challenges and this highlights the need to select a service provider that has a good track record in managing cells. The lessons from our own recent ICC experience have been as follows.
Having decided that the ICC was the appropriate structure to house certain risks, the first step was to present the regulator with the draft application for one captive licence for the ICC setting out one business plan for each of its three incorporated cells. The regulator approved the one captive licence along with written approval for each incorporated cell.
In its business plan, the client identified a risk class to be written in an additional cell that would come on-stream at a future point in time, if and when market conditions allowed. As the client already had the captive licence issued and business plan approved, the directors of the ICC were in a position to create and activate the additional incorporated cell when convenient for them, without having to reapply for approval.
The most practical advantage for the client was that each incorporated cell, with its own separate legal entity, could contract in its own right. Each incorporated cell, having its own legal identity and limited liability, was easily understood and allowed the client to have confidence in the architecture of the arrangement being implemented.
The PCC, by contrast, offers a diluted form of separate identity and liability that is unfamiliar to many potential clients.
The directors of the ICC (the core) and each incorporated cell were the same, giving rise to ‘governance’ economies of scale. The ICC can also commercially (and conveniently) loan, if needed, additional risk capital to each incorporated cell.
Furthermore, the client’s business plan, as signed off by the regulator, identified the option to establish additional incorporated cells in the future and thereby created flexibility and certainty for the client. The client had a tidy arrangement with one captive licence for the ICC and its cells (standard in Vanuatu) with no cell fees resulting in no additional regulatory cost.
Agency captives
This type of captive can be described as “formed and owned by one or more independent insurance agents and or insurance brokers to write high quality risks that they control”.
I have managed a variety of agency captives. In each case the advantages have been: (i) the agent or broker has influence and control over the book of business that would otherwise be under the sole dictate of the insurer; (ii) the convenience of writing business ‘in-house’; (iii) creating an insurance product that is unique and meets all the requirements of the client; (iv) flexibility around the scope of coverage and pricing; and (v) to cement their market position.
The key to success is to deal with agents and brokers who have the combination of the entrepreneurial spirit, skill, knowledge, experience and reputation both with insurers and clients. Interestingly, most of the successful agents and brokers I have come across possess all of these traits.
Finally, as with any captive programme, there is the need by them to commit and buy-in to understand any downsides as well as the benefits.
Vanuatu is a friendly jurisdiction willing and ready to do business. Given the many options available, the appropriate vehicle for forming a captive and the specific architecture of that programme is complex. The simple starting point for a corporate or small- and medium-sized client, agent or broker is to consider all structures and thereby create new horizons.
