Experts from Labuan International Business and Financial Centre share their thoughts about captive insurance success and future outlook in the jurisdiction
Labuan IBFC’s captive insurance sector has sustained an eight per cent annual premium growth since 2019, reaching US$624.6 million in gross premiums. What key factors are driving this consistent expansion in your market?
The consistent expansion of Labuan IBFC’s captive insurance sector can be attributed to several key factors. These include:
Robust regulatory framework — Labuan IBFC offers a well-established and business-friendly regulatory environment, which provides flexibility while ensuring compliance with international standards. This attracts companies looking for a reliable and transparent jurisdiction.
Growing awareness of risk management — Businesses are increasingly recognising the value of captive insurance as a strategic tool for risk management and cost control. They retain a portion of the risk and pay claims out of their own funds. This awareness has driven more companies to establish captives in Labuan IBFC.
Comprehensive range of services — Labuan IBFC's ecosystem offers a wide array of captive-related services, including captive management and reinsurance. The availability of these services supports the growth of the captive insurance market.
Regional economic growth — The economic expansion in the Asia Pacific region has led to increased demand for sophisticated insurance solutions, positioning Labuan IBFC as a strategic choice for companies seeking to optimise their risk management strategies.
Attractive tax regime — Labuan's favourable tax policies, including incentives for captive insurers, make it an attractive jurisdiction for companies aiming to achieve tax efficiency while managing their insurance needs.
Support for a variety of captive structures — The jurisdiction allows for various types of captive structures to be set up in both conventional and Shariah-compliant forms, such as single-parent captives, group captives, multi-owner captives, intermediary-owned captives, master rent-a-captives (MRAC), and protected cell companies (PCC), catering to diverse business needs and promoting sector growth.
Customisation and flexibility — Captive insurance allows companies to design insurance solutions that align closely with their risk profiles and business strategies. This customisation is especially appealing to larger organisations.
These factors, combined with Labuan IBFC's ongoing efforts to enhance its service offerings, contribute to the sustained growth in the captive insurance sector.
Engineering and general liability risks presently account for over 50 per cent of your gross premium volume. Why have these particular sectors gained such strong traction, particularly among Indonesian and Japanese businesses?
Labuan IBFC's regulatory framework supports the establishment and operation of captive insurance structures, including protected cell companies (PCCs), which can be particularly advantageous for managing distinct risks like engineering and liability. The ability to segregate risks within a PCC allows businesses to efficiently allocate resources for different risk types.
Labuan IBFC's strategic location and deep understanding of the Asia Pacific business environment, including key markets like Indonesia and Japan, make it an appealing option. Companies in these countries benefit from working with a jurisdiction that is geographically closer, operates within convenient time zones, and is familiar with regional business practices.
Given that your jurisdiction currently accommodates 69 captives, including pure captives, rent-a-captives, and PCCs, could you go through the unique benefits of each structure and how the recent regulatory improvements have enhanced their appeal?
The diverse captive structures available in Labuan IBFC offer unique benefits tailored to different business needs and risk appetites. Regulatory enhancements through the latest guidelines on captive insurance business updated by the regulator, the Labuan Financial Services Authority, in August 2023 have improved operational efficiency, compliance clarity, and overall appeal, encouraging more companies to consider establishing captives in this jurisdiction.
Each structure has its own unique advantages:
Pure captive
Tailored coverage — Companies can tailor their insurance coverage to suit their unique risk profiles, a feature that the traditional insurance market often lacks.
Cost control — Businesses can achieve potential cost savings over time by retaining risks within the captive and avoiding paying the profit margins of commercial insurers.
Risk retention — Companies can manage their risks more effectively, as they retain control over their insurance operations and claims management.
Rent-a-captive
Lower capital requirements — Provide a cost-effective option for companies that may not have the capital to set up a standalone captive. Businesses can share the costs of a captive without needing to invest heavily in infrastructure.
Flexibility — Companies can access captive benefits without committing to a full-time structure, allowing them to examine before making a more significant investment in a pure captive.
Access to expertise — Renting a captive often comes with access to experienced management and administrative services, helping businesses navigate the complexities of captive insurance.
PCC
Segregated risks — Multiple businesses can share a single captive, ensuring their risks and assets remain legally segregated. This structure minimises the cross-contamination of liabilities among different cells.
Cost efficiency — By sharing administrative and operational costs, businesses can lower their overall expenses while still enjoying the benefits of a captive insurance model.
Regulatory compliance — Compared to standalone captives, PCCs often benefit from simpler regulatory compliance because the framework streamlines the management of multiple cells under one roof.
During the Asian Captive Conference 2024, there was significant discussion around the Base Erosion and Profit Shifting 2.0 compliance. How are you guiding captive owners through these requirements while preserving their strategic effectiveness?
As new international tax rules aim to tax profits where economic activities occur, Base Erosion and Profit Shifting (BEPS) 2.0 compliance presents both challenges and opportunities for captive owners. By aligning captive operations with BEPS 2.0 requirements, focusing on economic substance, ensuring transfer pricing compliance, and adapting to the global minimum tax, captive owners can navigate the new landscape while maintaining the strategic advantages of their captives. Embracing compliance to strengthen governance can make captives even more effective at managing risks and optimising insurance strategies.
Speaking at that same conference, Nik Mohamed Din Nik Musa highlighted Labuan IBFC’s new omnibus guidelines. Could you elaborate on the innovative captive structures these enable?
Recent changes to Labuan IBFC's captive statute include broadening the scope of risk underwriting, permitting third-party risk, and introducing an external rent-a-captive offering (XRAC). XRAC, an entity with separate licences, assets, and accounts, simultaneously utilises the working capital of MRAC, with MRAC holding at least 50 per cent of the shares.
Small and medium enterprises are increasingly utilising captives for cybersecurity risks and contractual liability coverage. What makes Labuan IBFC particularly attractive for SME captive programmes?
The availability of cell captives and master rent-a-captives in Labuan IBFC allows for the ‘democratisation’ of self-insurance vehicles. These structures allow small and medium enterprises (SMEs) access to captive benefits — which includes experienced management and administrative services — while allowing them to share the costs of a captive without needing to invest heavily in infrastructure. Thus, the entry barriers for SMEs are lowered, making Labuan IBFC very attractive for this segment of companies.
Technology and AI emerged as key themes at the Asian Captive Conference. How is Labuan IBFC embracing these innovations to enhance captive operations and oversight?
Labuan IBFC anticipates that the adoption of technology and AI will help improve captive operations and setups, for instance, by streamlining administrative tasks related to underwriting, claims, or policy management. Additionally, AI-powered data analytics tools can enable captives to analyse large datasets to detect risk patterns and trends, anticipate future claims, and assess potential losses. The benefits extend beyond what we can currently imagine, but as a financial centre, Labuan IBFC will continue to keep abreast of all possible developments in order to stay relevant.
