Singapore’s Captive Market Poised to Rebound Following Global Financial Crisis

Singapore's captive insurance market has rebounded following the global financial crisis, with the help of its strategic location, regulatory system and market infrastructure and attractive tax regime, along with competitive insurance capital in Asia, according market experts.

Victor Pannuzzo, managing director of Marsh Management Services Singapore Pte. Ltd., told BestWeek Asia/Pacific that the local captive market was negatively affected by the global financial crisis in 2008, but interest in captives gradually recovered in 2009.

The market has been "fairly stagnant" in recent years, said Pannuzzo. While there have been new incorporations, some captives have been liquidated. Pannuzzo also said the market has been influenced by a "protracted period of soft insurance market conditions for most segments globally, but more so in the Asian region."

Although several captive applications have been postponed or shelved because of the financial crisis, Pannuzzo said he saw some "very encouraging signs" with some new incorporations, as well as an "unprecedented level of enquiries and captive diagnostic work" in 2009.

"I think the biggest issue in Asia at the moment is that insurance capital is relatively cheap despite the global financial crisis. The situation is different in other parts of the world as companies that have been affected by the global financial crisis have had to put off their plans to establish a captive," said Pannuzzo.

Willis, another captive manager in Singapore, noted that with the recovery from the financial crisis, companies would be in a better financial position to consider the costs associated with running a captive, and more importantly, increasing their risk retention through such a structured vehicle.

There is still a "relatively low" penetration of captives in the top Asia-Pacific companies and there will be a significant growth opportunity if this penetration increases to the same level as in the United States and Western Europe, noted Willis.

"We are cautiously optimistic on the market prospects in 2010," said George Ong, divisional director of Willis global captives practice, in an interview.

He explained that increasing awareness and greater focus placed on risk management among companies in Asia has also led to an increasing number of inquiries from prospects around the region.

"We have been busy with several captive feasibility studies, while the biggest growth potential is in China," said Ong.

A Diversified Market

Although there are no particular lines or sectors that have a more competitive advantage, Ong claimed corporations that have set up captives in Singapore come from "very diversified" industries, which is a reflection of the flexibility of potential captive insurance facilities.

According to Marsh, Singapore was "first to market" in terms of captives in the region. It has a regulatory framework that has been tested for more than 25 years. Clients like this level of "consistency in regulation," said Pannuzzo.

He noted the Monetary Authority of Singapore has a dedicated unit within their financial center development department that is "very proactive" in promoting Singapore as a captive-friendly jurisdiction.

Even with competition coming from other domiciles like Dubai, which recently introduced captive regulations that mirror Bermuda, including protected cell company legislation, Pannuzzo said he believes Singapore still has advantages in developing the regional captive market.

According to Ong, Singapore is still the market-leading domicile in the region with a "favorable" regulatory environment and "attractive" tax regime, although he continues to closely monitor developments in the Persian Gulf region.

Singapore also has the infrastructure to support the captive industry, with experienced professional captive managers and highly developed and diverse financial services including the major banks, insurers, auditors and investment advisers, said Pannuzzo.

He added that Singapore currently allows captives generating offshore underwriting and investment income to be effectively tax-exempt, which is "particularly attractive" for many Asian clients.

The geographic location is also a consideration, as Pannuzzo said Singapore makes it more "efficient than offshore domiciles" for meetings and daily correspondence to take place. He added that captive establishment and operating costs in Singapore tend to be more competitive than some of the recognized North American and European domiciles as well.

Singapore's main competition would come from New Zealand and Labuan, noted Ong. "Singapore has always been the most popular captive domicile for Australian companies, with over 50% of the captives here being Australian-owned."

"New Zealand has in recent years been actively promoting itself as an alternative captive domicile for Australian companies and has seen their captives growing from two to 22 between 2002 and 2008," said Ong.

With around 30 captives, Labuan is also "aggressively" promoting itself as a "lower-cost alternative to Singapore" and is looking at "introducing protected cell company legislation by the first quarter of 2010," said Ong.

Recent Performance

In reviewing Singapore's captive market performance in 2009, Pannuzzo said an important aspect to assess is "the level of underlying growth and enquiries."

"If we ignore the liquidations, based on history, we expect an average growth rate of about 5%. Also, there is a long lead time particularly for the establishment of Asian captives," said Pannuzzo.

He added the level of prospective activity coming from Asia is unprecedented and provides "fertile" growth opportunities in the near to medium term.

In Singapore, captives are governed by the Insurance Act (Chapter 142) and regulated by the Monetary Authority of Singapore. They are typically licensed to write insurance and reinsurance business. According to MAS, by the end of December 2009 there were 63 licensed captive insurers in Singapore.

In 2008, the MAS recorded gross premiums written by captive insurers of S$747 million (US$530 million), representing 19.3% of the total offshore insurance fund business in Singapore.

Marsh said in a report that there are certain provisions and exemptions extended to captive insurers under subsidiary legislation administered by MAS.

Captive insurers can choose to be taxed at a rate of 10% or 0%, depending on the parent company's requirements, of income generated by general insurance and reinsurance covering offshore risks or dividends and interest from investments arising out of the insurance of offshore risks, noted Marsh.

The tax exemption is granted for a period of 10 years and the approval period is open until Feb. 16, 2011. Otherwise, Marsh said captive insurers are subject to the normal corporate tax rate, which from 2010 is 17%.

MAS said it views development of the captive market as an integral part of increasing the breadth and depth of risk management offerings domestically. While recognizing the unique operating structure of captives, MAS said Singapore has in place an "appropriate licensing and regulatory framework" for captive insurers that consider the nature and risk of captives' business.

(By Rebecca Ng, Hong Kong news editor: [email protected])