Evolution of the insurance market
The success of St. Lucia's jurisdiction

During the last decade, the insurance industry has shown significant growth and an evolution towards the captive and reinsurance markets. In the United States of America, the hardening of the insurance market in particular in the professional liability area and the decline in equity markets made investments unable to support risk liabilities and insurance products became poorly priced. As a result, captive insurances started to be used to cope with these changes and to cover new risks areas. In addition, more and more European multinationals migrated to the United States of America (leaders in the use of captive insurance structures), which tended the European risk managers to reflect the financing mechanisms they found used in the US. It has been also noticed that new markets like Latin America, the Far East, Australia and Africa were abandoning traditional insurance to increase their self-insured retentions. These observations lead us to the question: why captives are so popular?

The popularity of captive insurance is first of all due to the evolution of the insurance industry but also to a better understanding of the industry and the introduction of innovative approaches to risk management. Captive insurance has many advantages versus the traditional market, which have lead insurance managers to use them:

Captive insurance permits tailoring, loss control, expenditure, insurance, and reinsurance coverage to meet the particular needs of each case. It is perfectly adapted and so more efficient than the traditional insurance market. The efficiency is increased by the fact that with a captive there is a much better knowledge of the parent's risks than with any outside insurer.

Captive insurances give access to the reinsurance market, which operates with much lower overheads, and more closely geared premiums to the record of the reinsured company than is usually the case with direct insurance.

As a result, reinsurance being one of the most free-flowing instruments of money transactions makes captives an easy vehicle to access other countries for better profitability or for additional exposure. That way captive companies may offer a much more convenient and economic solution where difficulties may be experienced by the direct market.

It gives the possibility to insure the "uninsurable" in the commercial market.

The creation of a captive can convert cost into profit: the premiums remain in the captive and can be invested to earn income until claims arrive. With traditional insurance such a practice is not possible.

Last but not the least, captive insurance can be run at much lower cost than traditional insurance that has to carry heavier expenses on branch network, acquisition costs…

Captive insurance can also benefit from tax advantages if it is established in an offshore financial centre. Tax saving gives the ability to accumulate investment income tax free in the territory of residence of the captive, to repatriate the earnings of the captive to its parent at a time which is suitable to the parent, and to reduce the level of taxable profits of the parent company and its subsidiaries in normally high-tax countries by the payment of tax deductible insurance premiums to the captive.

There are around 60 offshore jurisdictions in the world offering different captive insurance programs, so it is important to take into consideration the following points to choose the most appropriated one:

Flexible legislation and efficient regulation: the most popular captive insurance company locations have little limitations on the kind of investment a captive may make, accept a wide range of allowable assets and have favourable tax and exchange control. Reasonable capital requirements are also a plus. The application process should be simple and efficient without compromising the regulatory environment to maintain the integrity and a clean reputation. Ideally, a special body should be dedicated to regulate the insurance business.

Cost of supervision, registration, or other fees should be considered, both for establishment of the captive and for its on-going administration.

Local insurance expertise, together with appropriate legal accounting and banking support services. A good level of education of the local human resources is also an advantage. Cost and capability should be looked at together but in all events quality of professional services should prevail.

Political and economical stability of the location are very important too to avoid any problem of relocation and credibility. Moreover, the country should be easily accessible, and should have full communication infrastructures.

Very few jurisdictions offer all advantages. St. Lucia has managed to put in place one of the best combinations taking each point into consideration. As a result, despite its fairly early establishment St. Lucia is attracting many captive insurance programs. In this fast evolving industry, having a good base is not sufficient; it is also crucial to keep up to date. In that regard, the Government of St. Lucia is actively working on following the market's needs and working on introducing legislation for segregated cell companies that will satisfy also the demand for "rent-a-captive". Please visit www.pinnaclestlucia.com to have access to the full legislation and regulations (including the International Insurance Act), the Government fees, the list of service providers, and other relevant information on the new model offshore jurisdiction: St. Lucia.