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Don’T Be Held ‘Captive’ By Us Tax Crackdown

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas must not be deterred from making inroads into the multi-billion dollar captive insurance sector by a US tax crackdown, a local actuary said yesterday.

Rayon (Ray) Brown, principal at the actuarial consulting firm, Nichol & Co, told Tribune Business that the Internal Revenue Service’s (IRS) targeting of the industry would not apply to captives conducting real insurance business.

A 20-year insurance industry veteran, with extensive experience in both the Bahamas and UK, Mr Brown said significant improvements in this nation’s “talent pool” and regulatory environment had created the platform to increase its modest global captive market share.

Data produced by the sector’s trade media showed the Bahamas as having “only about 0.5 per cent of the number of captives in Bermuda and the Caribbean” at year-end 2016, and Mr Brown said there needed to be a private sector-driven effort to “sell” this nation and its qualities as a captive domicile.

Former US Justice Department tax attorneys, speaking to Tribune Business after last week’s Nassau Conference, warned that the Bahamas needed to be careful in going after captive insurance business given that the IRS has targeted the sector for audits and investigation.

Mr Brown, though, said the IRS efforts were of little concern for captives doing real insurance business, and he argued that the Bahamas should not be dissuaded from growing market share in an industry that could deliver multi-million benefits for the financial services and tourism industries, and associated professionals.

Emphasising that the Bahamas was not being singled out, Mr Brown, who started his actuarial career with Family Guardian, said locally-domiciled captives would be fine so long as they can “demonstrate you’re actually transferring risk to the captive and doing real business”.

While the IRS is concerned that captive insurers can be abused for tax evasion, he added: “In the captive industry, the people I’ve met don’t talk about tax.

“We should not be put off by that. That doesn’t bother me. They have regulations up there [the US] to deal with companies who abuse the system and get away without paying taxes, but as long as we’re doing real risk transfer we won’t have a problem.

“The main emphasis is not on taxation; it’s about risk mitigation,” Mr Brown continued. “It’s about insurance products. That does not represent the companies I’m targeting. I’m interested in setting up alternative risk mitigation products.”

Captive insurance is effectively a means of self-reinsurance. Companies and wealthy professionals establish captives as alternative risk management vehicles, using them to cover their own costly or unusual risks because they can obtain better prices or products tailored to their specific needs.

Mr Brown, who returned to the Bahamas full-time six months ago, said the demand for captive insurance products was rising globally as large companies sought creative means to manage increasingly large and complex risks.

Captives operate just like commercial insurance companies, collecting premium payments and paying out claims. They have their own Boards of Directors, insurance contracts and calculate premiums, and have to be licensed and regulated by supervisors in their home countries.

The Bahamas largely lost its captive insurance business to Bermuda in the early 1970s, following regulatory changes introduced by the then-Pindling administration, but Mr Brown yesterday said the foundation was in place for a concerted effort to re-establish its presence in the sector.

The Bahamas Financial Services Board (BFSB) has led private sector efforts targeting the captive insurance industry in recent years, working with the Insurance Commission and attending global conferences together.

However, data produced by The Captive Review, the sector’s trade publication, shows how far the Bahamas has to go. This nation was shown as having just 13 domiciled captive insurance companies at year-end 2016, along with four ‘cell’ companies and 157 ‘individual cells’.

This compares to 776 captives in Bermuda, and 626 in the Cayman Islands. Smaller Caribbean financial services rivals were also well ahead of the Bahamas, with Nevis and Anguilla home to 277 and 266 captives, respectively. Even St Lucia was ahead of the Bahamas with 40 captives.

Mr Brown said the data did not include the US, the largest captive domicile with a 50 per cent market share, while Bermuda and the rest of the Caribbean account for 40 per cent of the estimated 6,600-plus global captives.

“If you look at the list it’s just unbelievable,” he told Tribune Business. “The Bahamas, in terms of the number of captives overall, has only about 0.5 per cent of the number of captives in Bermuda and the Caribbean.

“You have places like St Lucia that have more than us, BVI. Anguilla has recently made a lot of changes and really been pushing it. They’re a much smaller country than us, and have been pushing it.”

Mr Brown said there would be a “tremendous”, multi-million dollar economic impact if the Bahamas could grow its captive insurance industry to 200-300 companies domiciled in this nation within the next five years.

He explained that the industry would create significant work for attorneys, accountants, company administrators, wealth managers and underwriters/actuaries. With assets worth multi-billion dollar sums insured by the global captive industry, the tourism industry will also benefit when their directors fly in to attend Board meetings.

Mr Brown said the Bahamas should target specific niches to revive its captive insurance segment, including health insurance and medical malpractice, plus the Asian market that was “opening up a bit more”.

And, while he had not researched the issue, he added that captive insurance could also be suitable for large Bahamas-based entities and concerns. He mentioned the fisheries sector, and its hurricane-related losses, as one sector that could benefit from a captive solution.

Mr Brown suggested that efforts to-date to revive the Bahamian captive insurance industry have been stymied by this nation’s perception as a ‘tax haven’, which deterred major companies from coming here due to reputational risk concerns.

He added that locations such as Bermuda and the Cayman Islands were regarded as “the Silicon Valley” of the captive industry because they had the necessary “talent pool” to service the requirements of multinational companies and institutions.

However, Mr Brown said the Bahamas’ workforce, in comparison, had “improved a whole lot” in recent years due to increased Bahamian ownership in the insurance industry, which had returned a lot of back office functions - previously outsourced - to this nation.

“That helps us by improving the products and solutions we can offer,” he told Tribune Business. “It’s going to allow business people, chief risk officers and chief executives, who are going to be making the decisions, to get a better understanding that we have experienced people in the country. It’s another attractive feature.”

Mr Brown said “another significant change” was the Registrar of Insurance’s upgrading into an Insurance Commission, with more regulatory expertise and autonomy from the Government.

“That’s a tremendous change,” he added. “That makes a huge difference. Instead of having people inside the public service, you have professionals.

“People in the industry are always looking for a quick turnaround time. Someone might see an opportunity to set up an SPV for a particular risk, and needs to know they can go into that venture, and that the deal can be executed and approved quickly and efficiently.”

Mr Brown said the Insurance Commission’s creation would encourage industry belief in a more rapid approvals process, and he urged Bahamians to market the possibilities globally.

“It’s going to take Bahamians who realise there’s an opportunity to go out there and be advocates for the industry,” he added,”being able to give feedback, participate in all the discussions.

“We have to sell the Bahamas as well as the talent that exists here.... It has to be private sector driven.”

Mr Brown, who has worked for companies including Willis Towers Watson, MetLife and Royal London, said his conversations with senior UK corporate executives had exposed “huge interest” in what the Bahamas can offer as a captive insurance domicile.

Comments

banker 1 week, 2 days ago

Because companies cannot put away untaxed money for emergencies and catastrophes, captives are the only vehicle to do so. Because money put into captives is untaxed, it is misused as not only a tax shelter, but also as a method of avoiding corporate income tax and taking capital out of the company in a "friendlier tax jurisdiction". Hence this is why the words US Tax Crackdown is in the headline.

We cannot become a competitive captive player because we do not have the open, transparent comprehensive tax information exchange. We are still a tax haven. What the people in the Bahamas Financial Services do not realise, is that the tax haven is dead. Instead we should be transitioning to modern financial services, but we haven't and we aren't. We still have the same old mentality that is no longer valid in the global marketplace. That is why our Financial Services are declining faster than a jungliss panties hitting the floor.

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