- Asia-based captives saw 58% increase in premiums in 2022
- Captive professionals in Singapore not concerned about OECD global minimum 15% tax
- More local talent needed to compete as jurisdiction grows
Singapore is experiencing “significant captive growth” from Asian parented companies, as the region sees an uptick in captive formations.
Captives can be formed in a number of different jurisdictions in the Asia Pacific region including domiciles such as Labuan, Hong Kong, Micronesia, Mainland China, and the Cook Islands. There is also a small number of captives in New Zealand and Australia.
Singapore is the region’s largest captive domicile, with 82 pure captives active in the jurisdiction at the end of 2022.
The domicile was one of the first jurisdictions in the region to introduced captive legislation, giving it more time to grow than some of its peers.
Two of the challenges facing Singapore’s development as a captive domicile are comparatively high operating costs and the familiar theme of needing to attract talent.
The percentage of Asia domiciled captives is relatively small when compared to Europe or the US, but this is increasing.
“You’re probably talking about 3% of the world’s captives, but what’s interesting is that over the last three years we saw captives with Asia-based parents have a 58% increase in premiums overall, and that’s more than any other region,” Lawrence Bird, captives consulting leader, Asia at Marsh told Captive Intelligence.
Bird said that this increase is partly because property values have gone up, and there is a large amount of property risk written within captives in Asia.
“Probably proportionately more than the US and Europe to some degree”, he added.
“The increase in property values has had an impact on the property premiums going up, but the increase in premiums is primarily due to the increased retention levels by captives in the region.”
The majority of captives in Singapore are owned by Australian businesses, but Bird said there is a growing interest from Asia parented entities.
Cyber is also an area of growth for captives in the jurisdiction as captive owners look to expand and diversify their portfolios.
“There continues to be challenges in terms of pricing and/or capacity for those looking to buy cyber insurance,” said James Wong, director, strategic risk consulting, Asia Pacific at WTW.
“Captives can certainly be solutions to complement commercial insurance capacity.”
Bird said that he has seen interest in insuring directors and officers, while employee benefits is also causing a lot of discussion.
He has had recent conversations concerning trade credit, a line of insurance not commonly written by captives.
“For clients with this risk profile, often up to 40% of their assets on the balance sheet comprise accounts receivable, and whilst the risks are generally well managed, this is possibly a significant exposure which captive owners can consider for a captive programme,” he said.
In December Captive Intelligence published a long-read exploring how the number of captives writing trade credit insurance looks set to increase as the current global economic environment worsens.
Kelvin Wu, head of insurance at Singapore-based Weybourne Holdings Pte Ltd, which owns Dyson Group and owns a Singapore captive, said he hopes to see the maturity and take-up rate continue to increase across the region.
“And to see more Asian-headquartered corporations explore and take on the mantle of wanting to have a captive,” Wu added.
Why Singapore?
George McGhie, independent consultant, and strategic adviser to Artex International, said one thing that separates Singapore from other domiciles in the region is that there is no risk-based capital or solvency margin requirements for most captives, with each company having to establish that the funding of the captive is “prudent” for the risk that it is assuming.
“That provides flexibility in the way the programme is put together, as the client is not bound by a formulaic approach to funding but can take a common-sense approach to the structure of the programme,” he said.
Wu said that he has experience of working in other captive domiciles, but he would put Singapore regulators “right up there” in terms of the clarity and transparency of what is required, “and in terms of the speed of response, supportive nature and ease of doing business”.
Singapore also benefits from a stable political landscape when compared to other domiciles in the region.
“Singapore has a strong political agenda, which is very stable, meaning as a business you have a clear direction,” Franck Baron, group deputy director risk management & insurance at International SOS, which owns a captive in Singapore, told Captive Intelligence.
Adrian Chua, regional head of captive and insurance management solutions, Asia Pacific at WTW, said that when considering captive domiciles, there are a few factors looked at.
“First is accessibility to the risk financing,” he said. “Second is talent pool and whether we have the right people with the talents on the ground.
“Finally, the most important part in any business, is whether there is political stability, and if you look through all the checkboxes, you realise that Singapore ticks all the boxes.”
Baron revealed to Captive Intelligence that PARIMA, the regional risk management association, was in the process of creating a captive owners’ association.
“We are creating a captive association, which is to become the body for captive owners in Singapore,” Baron said.
“This will allow us to have conversations with the Monetary Authority of Singapore (MAS) and help them to promote the domicile because this domicile is extremely supportive to business and risk management.”
Baron highlighted that those in the jurisdiction are creating an association because they believe there is a lot that can be done in order for risk managers to look at captives as a strategic risk financing tool.
“We are still seeing too many panic captives, because people look at it as being a way to absorb the insurance premium cycle, instead of creating something with a strong foundation at parent level where captives are viewed as a risk financing tool,” he said.
There has also been discussion about the potential introduction of PCC legislation in the jurisdiction, which would lower the barrier for entry for captives.
However, McGhie said that if we look at the time, effort and cost needed to introduce PCC legislation, the potential returns to Singapore in terms of number of corporate cells and premium that might be created “could be quite low”.
Tax
There has been talk about the Organisation for Economic Cooperation and Development (OECD) introducing a global minimum tax rate of 15% in 2025, but those in the jurisdiction believe it will have a limited impact on the domicile.
Bird believes a global minimum tax will not have any “major adverse effect” as captives are not generally formed for tax reasons, with domiciles most frequently being selected for regulatory and geographical reasons.
“There’s a lot of talk around this tax rate and whether it’ll happen,” he said. “I think it probably will at some point, but I think it might be a way off yet.”
Bird noted that Singapore currently has a 17% tax rate which he believes “works well” for captives in the domicile.
“It seems to be a suitable number and it’s slightly above the OECD threshold of the stated 15% but below the global average of around 25%,” he said.
“With the number of double taxation treaties that Singapore has got in place, people are benefitting from such treaties.”
Chua said that as we are going to land at a common rate of 15% tax, a potential 2% difference today, is not going to be “too material”.
“The fact that Singapore has Avoidance of Double Taxation Agreements (DTAs), limited DTAs in place puts us in really good position,” he added.
Despite discussion around a global tax rate, Wu said that those familiar with setting up captives or working in the captive space believe that tax should never be the primary motivation for setting up a captive.
“It’s one of the ancillary considerations, and if your business case doesn’t stand on its own two legs without any tax incentives then you’re completely missing the point,” he added.
Baron said that if a company is having the correct conversations internally about how to structure a risk financing tool, such as a captive “then tax is an element, but it should not be the main reason for it”.
Challenges
One challenge for captive domiciles in Asia is the conversion to the IFRS 17 accounting standard, which Bird said is a “major exercise and involves additional one-off costs”.
“It should be the case, however, that once implemented, the ongoing requirements should be relatively straight-forward for most captive programmes and any additional requirements such as actuarial input will merely match requirements that many major captive domiciles already have,” Bird added.
McGhie said operating costs are a big issue for captives in Singapore, especially with current inflationary pressures and the competition for talent locally.
“Being a global (re)insurance centre means all the captive skills are here, but there’s a lot of competition with other sectors for a finite pool of talent,” he said.
Bird said that Singapore will have to continue to evolve if it is to compete with a growing number of peers in the region with captive legislation.
“A successful model is going to be copied and repeated, and we’ll continue to see other domiciles pop up and try to grow,” he said.
“For a domicile to continue to be successful, it needs to be innovative and that’s the danger. If you don’t stay innovative, then somebody will overtake you eventually.”
Compared to other domiciles in the region such as Labuan, Singapore appears to not be as active in terms of marketing or promoting itself.
“I don’t think that the authorities are doing enough to be honest,” Baron said. “I think it should change as in order for a domicile to be at the right level of professionalism and proficiency, you need to be at the right level of activity.”
Baron said that if he had a “minus” about Singapore as a domicile, it is that the ecosystem, the consulting firms, the key management services firms, the pool of talent and the professionalism “is not yet at the right level”.
However, Wong believes that Singapore has a strong pool of talent compared to other domiciles in the region.
“Having a strong talent pool certainly helps,” he said. “In general, we are very well recognised by large companies in the region as a credible market to operate in.
“We often find that potential or existing captive owners having a sizable operation here, making it more convenient and efficient to set up their captives.”
Baron hopes to see more local talent come to fore as the jurisdiction grows.
“I don’t like the idea that in Asia you need to bring somebody from Europe or the US to make it happen,” he said.
“We are witnessing a growing number of local talents, and people developing at the right level, which is nice.
“The last thing I want to see is to look at the talent issue as being fixed by just importing from London.”