George M. Mangion | Wednesday, 27 May 2009

Captives - Flying the Maple leaf

It was a sunny afternoon last week as I landed at Toronto‘s modern airport which to my surprise was blessed with a sunny breeze in the 20 degrees Celsius.
Passing through security can be an interesting experience nowadays. The security guards are polite but stricter than I imagined and one questioned me why our passports are not printed on the modern biometric model since the old ones could be easy forged. They smiled and asked me for the purpose to visit and amidst telling them that this was my fifth visit to Canada, I proudly showed them my name as a speaker in the fifth Annual Canadian Captive Insurance summit. This was hosted at the Pantages Hotel in downtown Toronto.
The document did the trick and excused the lie that my eight year old photo on my passport has concealed a number of white hairs and a rich double chin that I sport in 2009. This is the second time that PKF Malta sponsored this event and is proud to form part of a number of leading risk managers and insurance professionals who share their experience with delegates. Among others it featured renowned experts such as Ian Matheson, Chief Development Officer and Director, Aon Reed Stenhouse Carol Arendall, Senior Director, Risk Management, OfficeMax inc. (IL) ,Pierre Parizeau, VP, Insurance Services, SNC Lavalin (Montreal) ,William F. McMahon, ARM, RPA, Risk Manager, Fleetwood Enterprises (CA) and John Roberts, Director, Risk and Insurance, British Columbia Ferry Services Inc. The main theme was that of mustering the much hyped recovery strategy. It aimed to offer insights on mitigating risks, maintaining stability and minimising costs amidst economic crisis.
The timing of the two day conference is ideal for captives as observers claim that the commercial insurance markets are on the verge of hardening. With increased pricing and restricted capacity looming on the horizon, risk managers need to come up to speed with the options available so they can make informed decisions.
It goes without saying that the main trust of the event concerned Canadian and North American interests in the field of captives both single -parent and hybrid captives as well as the investment strategies that they must adopt to beat the downward trend in returns on capital. Other topics featured on the implementation of IFRS in financial statements , where tax can be less taxing, use of collateral options, corporate governance obligations , funding employee benefits and finding the ideal overseas jurisdiction to relocate your captive.
Leading energy and telecommunications organisations in Canada are were present for the Summit which was sponsored by four jurisdictions that is Invest Barbados, PKF Malta, St. Lucia International Financial Services and International Financial Centre, British Columbia
So one may ask when the financial markets are so fragile is there a chance of a quick and sturdy recovery. Yes the timing is propitious since the hardening of insurance markets call for better utilisation of superior risk management, via the skilful pooling of diverse risk appetites in a well regulated domicile.
Certainly managers are witnessing increased pricing and a general tightening of capacity that inevitably pushes them to become chosier where to host their domicile.
One of the main topics discussed in Toronto was the need for captive managers to maintain quality in dire times and not to succumb to the temptations to cut corners. All this when all around you one sees insurers were cutting rates with every renewal.
Certainly delegates were all in unison that one of the real benefits of participating in a captive is your ability to truly control your claims and promote safety within your organization. In difficult times such as these one has to take direct responsibility for claims because captives are funding those losses directly, not passing them along to an reinsurer.
In a tough world insurers often turn their backs on new opportunities, either by raising rates or actually refusing coverage, particularly as the market hardens. This is usually accompanied with higher reinsurance industry costs and other factors. Speakers emphasised that sound risk management techniques cannot be take a short term speculative approach. Thus the thriving captives in Bermuda and other Caribbean states were successful since owners took a long-term commitment.
Captives, however, are by far not a panacea for sloppy risk management.
At a pre-conference workshop which I attended Bill Morgan ,managing director of the world renown insurance firm AON ( B.C ) explained in simple terms demystifying the myth about captives.
A captive reinsurance company is a reinsurance company created or owned by an industrial, commercial or financial group, the purpose of which is to reinsure exclusively all or part of the risks of the group it belongs to.
Companies are of late being confronted with an escalating number of risks while, at the same time, steadily growing corporate governance requirements result in additional rules relating to the tracking and management of these risks.
At the second day of the conferences delegates were given details on new constraints, combined with growing competition, worldwide uncertainty and increasing dependency on financial markets force companies to search for alternative solutions to control and finance their risks. Among the subjects were the preparations needed to implement the internal IT models demanded by European Solvency 11 directive.
The implementation of a risk assessment policy is now essential to arrive at the Solvency margins and the capital needed to avoid reaching a critical minimum solvency margin.
Still the speakers all concurred that among these alternatives, the captive model still presents numerous benefits, notably in terms of the monitoring and reduction of costs and the ongoing tracking and particularly in Europe the integration of risk management policy at a group supervisory level.
In such a case, the use of a captive will enable the global economic strength of the group to be taken into consideration and allow an increase in global risk retention above the local deductible of the individual affiliates and business units while offering them adequate protection.
Put simply, a captive epitomises the centralisation of worldwide insurance programmes and the collection of group risk data (loss statistics, nature of the cover, control measures, etc.). This in turn enables risk to be managed at group level, thereby guarantee a better risk awareness at an operational level and increased transparency .It is a proven fact that a pure captive cannot simply replace the traditional qualities of an active risk assessment function together with superior claims handling techniques. The mantra is active risk control.
So the obvious question to follow is how active are jurisdictions to mitigate the downturn of the economies and what fiscal measures have each taken to attract more applications to their shores. It is true that the registrations have eased of late. Leading captive domiciles in Europe and in the North America continued to register a drop in new captive companies while the number of liquidations worldwide also continued at a high rate last year.
Some domiciles are reporting a number of liquidations, mergers and acquisitions, leading to the combination of risk management programs and the consolidation of new and larger captives.
Some offshore domiciles such as Bermuda reported some growth, but not at an accelerated pace.
Dublin previously branded the Celtic Tiger is now wilting as the recession bites in. Previously up to 2007, it proudly claimed to be the domicile of choice for European companies and U.S. companies needing a captive facility for European subsidiaries, but the domicile did face a lull in formations following its outright rejection of the Lisbon treaty last year. By comparison Guernsey, a pioneer in protected cell companies, reported some growth in formations, fueled mainly by new protected cell companies. To conclude PKF has continued in its crusade to promote Malta as a budding domicile in the southern Mediterrean. With an effective double tax treaty in both Canada and USA it competes with other jurisdictions as a well regulated domicile devoid of the tax haven status of some of its well heeled competitors. Although our growth is modest there is nothing to stop us matching the growth of other EU members such as Luxembourg. We can also offer a good match for Barbados as a major domicile for Canadian owned captives and PCC ’s.
After the downturn is over, they say the future beckons but as always when the revival returns it is the early bird that catches the worm.

George Mangion
Partner at PKF – an audit and business advisory firm



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27 May 2009

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