Sen Foulkes comments on interest in The Bahamas as int'l insurance centre

Wed, May 27th 2009, 12:00 AM

Senate Presentation by Senator the Hon. Dion Foulkes, Minister of Labour and Social Development on a Bill for an Act to Revise the law regulating the carrying on of External Insurance Business from within The Bahamas

Captive Insurance in The Bahamas
25th May, 2009

I move first reading and committal of the above mentioned Bill.

In recent years, there has been resurgence in interest in The Bahamas as an international insurance centre. There are a number of reasons for this:

- The introduction of new insurance legislation incorporating innovative features unique to The Bahamas
- Increasingly restrictive insurance regulation in many onshore jurisdictions
- The high cost of conducting insurance business ? both onshore and in some of the other offshore insurance centers
- Changes in onshore tax laws (notably in the US and Canada) that have removed most of the remaining tax advantages of offshore trusts and corporations
- The continuing need for new products for the very substantial Bahamian banking and trust community
This latter has become a priority as a result of the recent blacklisting of The Bahamas which has forced the financial sector to search much more aggressively for structural alternatives

Captive Insurance

1. Captive insurance is a method whereby business establishments can reduce their insurance cost, expand the coverage available to them and at the same time do it in a tax-efficient manner, at least insofar as the US and other taxing jurisdictions are concerned. It represents a method of increasing funds under management and in a way that creates permanent customers for financial institutions.

2. The term "Captive" is used generally to describe an insurance company that insures the risks of its owners who are not in the business of insurance. In its purest applications, it is a means of self insurance but the reality is that many captives now buy reinsurance and do a proportion of their business with third parties.


Benefits in setting up a "Captive":

1. Cost reductions
Any person or entity paying an insurance premium to a conventional insurance company is paying commissions and contributing to the expenses and profits of the insurer. By setting up your own insurer, such costs and profits become your own and can be allocated as you wish.

2. Risk Management
Many businesses are forced to buy insurance at market rates when their risk profile is lower than the industry average. By using its own insurer, a business can control its exposure by use of deductibles and reinsurance such that it can cover itself more effectively at less cost. Medical groups often use captives for this reason.

3. Cash Flow benefits
Having your own insurance company allows the owner to control the investment portfolio to which the excess premiums are applied. Obviously this would not be the case when purchasing insurance from a normal third party insurer. Also, offshore insurance companies have much more flexibility in terms of what they may invest in that their highly regulated onshore equivalents.

4. Reinsurance
The owner of a captive clearly wishes it to remain solvent and profitable. Bearing in mind that all or much of a captive's business involves insuring the owners risks, the claims records of captives tends to be much better than a normal insurer. This is recognized in the reinsurance market and the premium rates for captives can often be substantially less than for onshore insurers.

5. Availability of cover
Certain types of cover are unavailable onshore - either as direct insurance or as reinsurance. Offshore regulations enable the owner of a captive to insure almost any legal risk as well as allowing access to the enormous and flexible international reinsurance market.

6. Profit center diversification
Many mature businesses reach a stage where they wish to accumulate profits outside their own jurisdiction and in an activity separate and apart form their normal course of business. This may be for asset protection, tax efficiency or simple diversification reasons. The taxation of captives is well established in law with anti-avoidance provisions in many onshore jurisdictions. Nevertheless, correctly designed captives can provide a range of benefits for the owner.

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