Competition keeps domiciles on their toes, says Melisa Johnson of AMS Insurance
When a business is faced with competition, it is forced to compete if it wants to survive. With competition present, a business has to provide a superior service, an innovative product or differentiate itself. What happens when new competition enters an industry? When a new airline flies from a destination you see prices drop, and if a new coffee shop opens around the corner, you see better service or new products from the existing shops.
For most businesses, competition is a given. However, for the captive industry there were a few select domiciles that captive owners could choose with robust and effective captive legislation. These historic domiciles that have had the luxury of relatively low competition must now differentiate themselves from new competitors.
The first legislation was formalised in 1978 by Bermuda, with the Cayman Islands formalising its regulations shortly after. It wasn’t until 1981 that Vermont became the first US state to enact captive statutes. There were just a handful of domiciles then, but now there are close to 100 captive domiciles, providing captive owners with a variety of choice.
These new domiciles have current legislation and are looking to grow. The historic markets must separate themselves from other domiciles or risk losing the market share they have held for so many years. Many of the historical domiciles are now looking for ways to maintain this dominance and remain competitive in today’s market.
What are the advantages of this competition?
Competition validates your product
The first captive was formed in the late 1950s, and by the mid 1980s, most Fortune 500 companies were utilising some form of captive structure. Fast-forward to today and most mid-size businesses have either established a captive or are researching the implications of establishing one.
New captive domiciles joining the market further validates the importance of the alternative risk market and the role it plays in today’s businesses.
Competition helps to educate your target market
As you would expect, to be first can be a huge advantage, however, that also comes with the issues of educating the market on the risks and rewards of utilising a captive structure. The first domiciles had the task of educating businesses as to the solutions that the alternative risk market could provide.
The original domiciles spent countless hours and funds attending conferences, writing articles and even creating their own conferences to educate the business community. If you look back at the first captive conference held in Cayman in the late 1980s, there were about 250 attendees—this grew to approximately 1,900 in 2014, making it one of the largest captive conferences in the world.
The new domiciles reap all the benefits of an educated marketplace without the need to spend time and money to educate the market on their product.
Competition pushes you
Businesses that have little or no competition become stagnant. Customers have few alternatives to choose from, so there is no incentive to innovate. Constant competition ensures that your marketplace continues to evolve.
Let us take, for example, timeframes for gaining regulatory approval. Historically, it was acceptable for the approval process to take four to six weeks. With newer domiciles being forced to differentiate themselves, some domiciles have a conditional approval within 24 hours of submission. How can they do this when historically it took so long to rain regulatory approval? They were forced to find a way to streamline the submission process in order to provide a more responsive turnaround of new applications.
How the established domiciles react to the new domiciles pushing change will determine how successful they will be at not only creating new business, but also maintaining their existing business.
Competition forces focus
Without competition, it is easy to lose focus. The domiciles have a difficult job of maintaining a focus on regulatory control in a user-friendly environment.
In the current environment, domiciles must focus on what the captive owners need and how to make doing business easier while still maintaining regulatory control. This is a delicate process to balance. Take, for example, wanting to grant approval in 24 hours: how do you maintain enough regulatory controls to ensure the business is in line with the laws and regulations of the domicile?
A new domicile may be able to increase its market share, but to maintain a position for the long run it will have to find a way to balance the two sides.
Competition forces differentiation
In a regulated industry, it is often difficult to differentiate your product, especially in the US domiciles. If you cannot differentiate your product, how do you make a successful entry into the market?
Staffing: one of the best things any organisation can do is hire knowledgeable and qualified staff. It doesn’t matter how current and efficient your regulations and policies are, if you don’t have an educated team you will not be able to compete in the market. Response time: in today’s business environment responses are expected instantaneously. Gone are the days when waiting a week for a reply was acceptable. Those domiciles that want to earn a place in the top tier or those that want to maintain their current book of business must provide a timely and meaningful reply.
Competition is challenging: when you have strong competitors, you will lose business to them. Every time you open a magazine or attend a conference you hear the onshore versus offshore discussion. There are an increasing number of captives that are moving domiciles mainly due to the fact that they can get what they need in another domicile for a lower cost of capital and/or a quick response. Therefore, they see greater value for money in another domicile.
The original domiciles were very fortunate to operate in a market for so long without major competition. Imitation is the greatest form of flattery so it pays to be prepared for it. Domiciles that want to flourish will have to sharpen their elbows and get ready to play tougher in the market. Get ready for cheap shots and lost opportunities. It is a more streetwise world where domiciles will follow their competitors’ examples when they get the chance. Most importantly for regulators and service providers alike, make sure that competition makes your domicile better.
