Industry experts discuss the growth potential of the immature yet competitive captive market in Asia Pacific, as well as emerging risks and the importance of robust regulatory regimes
The volatility experienced over the last two years has undoubtedly highlighted the interconnectivity of risk and placed risk management as increasingly critical within any organisation.
As the focus of many risk management teams shifts from event-based to impact-based assessments, as well as earlier and more detailed mapping of current and emerging risks against an organisation’s risk appetite, future-proofing is particularly important as markets reopen and recover amid ongoing uncertainty.
This is particularly critical in Asia Pacific (APAC), where the diversity of the region’s geopolitics and the disparity in levels of economic development poses difficulties in the generalisation of risks, especially with the proliferation of long-tail risks.
This is according to Aon’s 2022 Asia Market Review (subtitled ‘Managing risk in connected Asia’), which notes that as traditional industry borders dissolve, ecosystems and the digital platforms that enable them will become increasingly influential forces in the future of business and financial services.
The market review adds that digital transformation in APAC is accelerating at a faster pace than any other region, which presents unique opportunities to maximise growth. For example, in the renewable energy industry, climate change and a widening appetite for newer technologies and solutions in Asia (such as offshore wind, floating solar power and battery energy storage systems) corroborates increasingly prevalent ESG agendas.
Other emerging risks in the region, as a result of digital transformation, include business interruption, intellectual property and cyber risk. Business interruption is particularly exacerbated by geopolitical and supply chain disruptions, while intellectual.property considerations are particularly important in an innovation-driven economy. And, of course, cyber risk requires underwriting confidence as ransomware preparedness, response and recovery capabilities improve.
“There is significant potential for captive growth in Asia Pacific,” affirms Lawrence Bird, director of captive and insurance management operations, APAC, WTW. “Growth has been steady in recent years and we are now seeing an increase in enquiries as the external market has hardened and continues to be challenging on price and capacity in some sectors.”
Bird explains that this has led to an increase in new captive formations and the number of commissioned feasibility studies, as well as growth in existing captives in the form of increasing captive retention levels.
As with the rest of the global captive industry, Shiwei Jin, global programme and captive regional director, APAC, AXA XL, notes the hardening commercial market has motivated captives to fill coverage gaps, or in some cases take on all risk, for professional indemnity (PI) and directors’ and officers’ liability (D&O) lines. She adds that this is particularly seen in financial institutions in Australia, and to a lesser degree in Asia over the last two and a half years.
“We definitely see more eagerness and actual take-up from companies to either expand their use of captives or formulate captives for traditional property and casualty lines, as well as less traditional lines. Some captives see this situation as a long-term solution while others see it as a short-term fix. The new lines of business are PI, D&O, cyber, environmental and employee benefits globally, and to some degree in our APAC region as well,” Jin explains.
Alastair Nicoll, regional director, captive management, Aon, adds that although most captive domiciles are receiving new enquiries and licence applications, data on how many enquiries result in new captives is not readily available. He notes that as the conference circuit opens up post-pandemic, this will boost the marketing agendas of domiciles.
A competitive market
And there is certainly no shortage of domiciles in the APAC region, each with their own unique selling points, as Nicoll points out. Singapore has emerged as a significant reinsurance centre and a global capital for Asian risk transfer, with annual statistics demonstrating that Singapore retains a slight lead over other domiciles in Asia.
WTW’s Bird adds: “The majority of captive domiciles in the region, especially long-established domiciles like Singapore, are well placed to attract the increased demand for captives in Asia Pacific.”
For example, in early 2020, the Singapore Government extended the Insurance Business Development captive insurance umbrella scheme until 31 December 2025. The scheme is designed to support Singapore’s value proposition as an Asian insurance and reinsurance hub by granting a concessionary tax rate of 10 per cent for five years on qualifying income derived from onshore reinsurance by approved insurers. Captives that do not apply for this scheme are then taxed at the standard corporate tax rate of 17 per cent.
In addition, the Monetary Authority of Singapore’s ILS Grant Scheme funds up to 100 per cent of upfront ILS bond issuance costs in Singapore. The first catastrophe bond issued under the ILS regulatory regime in March 2019 was sponsored by Insurance Australia Group (IAG), and structured and placed by GC Securities, to provide IAG with AUD$75 million of annual aggregate catastrophe protection for three years.
This marked an important milestone for alternative risk transfer and financing in the APAC region, which has unique disaster protection needs. Bird notes that increased interest under the umbrella of climate, catastrophe and ESG-related risks means that Singapore-listed companies are now required to include climate disclosures in their sustainability reports.
With the grant incentive extended until 31 December 2022, the wider Asian ILS market seems on track to continue to accelerate as Asian ILS products (such as collateralised reinsurance, sidecars, protected cells, and industry loss warranties) position themselves to offer an attractive diversification away from traditional US natural catastrophe risk.
Another jurisdiction in APAC that stands out as an attractive hub for international risk management and insurance is Hong Kong, with Nicoll saying: “Hong Kong authorities continue to market its benefits as a domicile.”
For example, in March 2021 the Insurance Authority (IA) expanded the scope of insurable risks by Hong Kong-based captive insurers. This was designed to further consolidate the role of captive insurers as an intra-group risk management centre, as well as to reinforce Hong Kong’s position as a preferred captive domicile by state-owned enterprises from Mainland China.
In addition, the Hong Kong Specialty Risks Consortium helps to match supply and demand in speciality risks, while complementing the IA’s captive initiatives.
The consortium pools risk owners with exposure to specialty risks in their overseas projects with services providers (such as insurers, reinsurers, and brokers) that offer risk management, insurance and reinsurance solutions.
As well as captive insurance, Hong Kong is beginning to develop its ILS market, having issued its first ILS catastrophe bond in October 2021. Hong Kong is in a strong position to become a preferred ILS domicile owing to its status as an international financial centre with free flow of capital, while the IA recently revealed its five-year plan to leverage Hong Kong’s position as a captive domicile and reinsurance hub and to solidify the strategic position as a risk management centre for mainland business.
The third important domicile for alternative risk transfer in APAC is the Labuan International Business and Financial Centre (Labuan IBFC). With protected cell legislation unique to the APAC region, the jurisdiction hosts a significant number of cell captives as a quick and convenient solution for coverage.
In addition, Labuan IBFC recently published its strategic roadmap for the next five years, which includes captive insurance as a significant pillar, by promoting captive structures to encourage economic recovery, resiliency, and market sustainability.
AXA XL’s Jin summarises: “Established captive domiciles such as Singapore, Labuan and Hong Kong have been renewing or expanding their legislation for captives. This provides certainty and attraction for new captives in the region and APAC parent companies to move its captives back home.”
On the importance of a robust regulatory framework, Jin adds: “Regulatory changes to captive legislation have a critical role in shaping the future of captives in APAC.” This includes new regulatory regimes to create new captive domiciles and captive markets with significant growth potential.
For example, Jin outlines that India’s Gujarat International Finance Tec-City (GIFT) is beginning to position itself as a captive domicile after years of the industry pushing for captive legislation in India. “GIFT’s captive legislation will allow Indian-headquartered companies to form pure captives to write risk for a company’s Indian-based exposures only,” Jin explains. “Indian clients have been taking tangible steps to explore captives and benefit from such legislation change.”
Aon’s Nicoll affirms: “The regulatory environment drives a professional captive community. The well-known jurisdictions need to balance their marketing efforts with their regulatory responsibilities. Less mature domiciles spend more time marketing and the more established ones spend more time regulating.”
He adds that positioning a domicile as attractive is a collaborative effort between regulatory bodies, captive managers, legal firms, and other service providers. “The tax regimes are a factor as is political stability and related captive infrastructures. Furthermore, a large part is played by the captive owners themselves, which demonstrates the reality of an effective environment in which to operate,” Nicoll says.
Moving forward
Turning to the future landscape of the Asian captive industry, Nicoll highlights the importance of regulators ensuring that licenses are issued to responsible organisations that operate ethically and transparently to foster a strong captive market in the region. He notes that some regulators are now devoting more attention to captive applications with higher exposures to ESG risk.
“With increasing focus on ESG, there is a growing need for environmental risk to align with the ESG aspirations of multinational parent companies,” he notes.
WTW’s Bird adds that many clients are expressing heightened interest around ESG-related risks and the associated reputational implications for their company. As well as the aforementioned climate disclosures in Singapore, he outlines that the Malaysian Stock Exchange has introduced governance and diversity requirements, while China has introduced new environmental disclosure rules.
“Companies will need to extend their enterprise risk management processes to cater for ESG-related challenges, and captives will likely facilitate the financing of such exposures,” Bird anticipates.
As well as ESG considerations, the future of the captive industry, both in APAC and globally, will be increasingly informed by tax schemes and systems.
Nicoll says that global adoption of the Organisation for Economic Cooperation and Development’s base erosion and profit-shifting (BEPS) guidelines has induced domiciles in the APAC region to clarify their tax incentive schemes and corporate tax systems. This includes the adoption of substance and transfer pricing regulations, as well as the upcoming minimum effective tax rate under the new BEPS framework.
Bird adds that the approaching IFRS 17 for insurance companies is likely to significantly impact captives in many domiciles when the standard is introduced on 1 January 2023.
“IFRS 17 appears excessive for captives, but they will need to adopt the standards in the domiciles in the region, which is a tall order,” Bird says. “Captives will need to appoint experts in this field or work with their captive managers to guide them through this process and ensure that the captive continues to give its wider group the benefits that captives bring overall.”
The importance of intra-company collaboration and cooperation is affirmed by Jin, as she explains that since the COVID-19 pandemic, the risk management function is developing more robust connections with the core functions of an enterprise to improve overall resilience.
She says: “The long-term strategic view and early planning is critical for the APAC captive industry. Companies in APAC, especially multinationals, are fostering a more holistic risk management mindset.”
For captives specifically, the feasibility process allows an organisation to assess and manage its risks from a more strategic perspective. This then enables data collection which can be used as a foundation to cultivate more detailed risk knowledge.
“As a result, the organisations can understand and quantify risks they face more effectively. They can also better define their risk appetite and risk financing strategy. Even if the immediate decision is not to set up a captive, the changing market conditions have opened the potential for exploring captives as a long-term strategic risk management tool,” Jin concludes.
