- Captive use increasing but market commanded by large business
- Single parent most common captive structure but cell use rising
- Offshore domiciles such as Bermuda, Cayman and Barbados remain popular, Vermont targets Mexico
- Captive education and fronting capacity pose key challenges for Latam growth
The use of captives by companies based in Latin America is increasing, but a significant gap remains between the number of large corporates using captives compared to the number of medium and smaller businesses utilising them.
Despite proliferating captive use, it is generally considered that the number of companies with captives in Latam is lower than other regions such as the United States and Europe.
As those in the region attempt to grow the profile of captives, challenges remain such as educating key stakeholders on captive advantages and finding adequate local fronting capacity.
One of the main drivers of captive utilisation in Latam is the hard commercial market, which has caused rates to increase, terms & conditions to tighten and capacity to shrink.
“If the premiums become unreasonably high for the coverages that they have, they may decide to create a captive,” Espy Mead, principal and founder at Actuarial Factor, told Captive Intelligence.
Luis Delgado, Latam regional director at Strategic Risk Solutions (SRS), told Captive Intelligence that increasing interest in captives is one of the main reasons SRS has decided to put “boots on the ground” in the region.
“Being in the region makes it much easier to travel and see clients,” he said.
Delgado relocated to Colombia last month and was appointed Latam regional director at SRS, with the captive manager also planning further expansion in the region.
“Latin America represents an important region for SRS,” said Brady Young, CEO of SRS. “We believe there are significant opportunities for Latam parent organisations to make greater use of captive insurance.”
Mead believes the US has a greater number of medium sized businesses that own captives, “whereas in Latin America, I will say probably it is still at the beginning stages.”
“There’s still a lot of opportunity for that top tier, and we have not really even come down to the medium sized business yet,” she said.
Felipe Chacon, regional distribution leader at Zurich, said that there is a significant number of Latam companies that are operating in multiple countries in the region and they could be contenders for captives.
“But only a few of them are more broadly international, and it’s those companies that are most active with captives,” he said.
Santiago Gomez, head officer of PEMEX’s captive reinsurance company, told Captive Intelligence that opinions and data on Latam should be taken with a degree of caution when attempting to paint an overall picture of Latam captives.
“It’s hard to have an opinion from data collected by companies providing captive management services as they generally base their opinions on the captives that they are managing, and potentially leaving out self-managed captives,” he said.
PEMEX is a Mexican state-owned petroleum company managed and operated by the Mexican government and is Latin America’s second largest company by revenue.
The company has a self-managed single-parent captive domiciled in Switzerland, which is considered one of the biggest captives domiciled in the country, and one of the largest captives owned by a Latin American business.
Gomez believes that if we looked at a ratio of companies forming part of the major World Market Indices compared with the number of such companies that own a captive from South America, Europe or in Asia, “this would be low, and consequently there would be large potential to grow across the board”.
“Maybe such ratio shows no large differences between countries of Latin America and countries from Europe,” he said.
Captive type and lines of risk
Single-parent captives are generally considered the most common captive structure for companies based in Latin America, but there has been an uptick in the number of cells being utilised as well.
“On the lower segment there’s a lot of companies using protected cell companies from Mexico and Colombia,” Chacon told Captive Intelligence.
“But those companies are usually operating in one or two countries and they’re looking specifically for one solution.
Adriana Scherzinger, head of alternative risk solutions at Zurich North America, said that a cell is sometimes used by companies in the region as a steppingstone into thinking about utilising captives instead of creating their own single parent captive from the beginning.
“They can start by trying this concept and see how it works, and seeing if they can live with the expense,” she added.
Gabriel Holschneider, founder, CEO & chairman at Rainmaker Group, noted that group captives have become “interesting” in the automobile space in Latin America and that the company was making” great progress” in traditional auto.
“This has been the prominent market in the US, but it’s essentially untapped in Latin America,” he told Captive Intelligence.
“We’re doing very well in group captives for extended warranty of dealerships, for example.”
Delgado noted that SRS is primarily seeing property, sabotage and terrorism, business interruption, cyber and directors and officers insurance being written in Latam captives, but employee benefits and workers’ compensation, which are common in other regions, are less frequently being placed into captives in the region.
Mead said that some captives in the region act as reinsurer and they generally write standard coverages, such as property, general liability, cargo, crime, cyber, political risk, facultative, large catastrophe and business interruption.
“We do also have some clients that write professional liability and D&O,” she added.
Scherzinger said that one line she always sees is property. “Especially now with the challenging markets, we’re seeing property captives in Latin America assuming greater levels of risk.”
Speaking on GCP #48 in 2021, Rene Martinez Flores, global director of insurance & risk management for Mexico’s building materials giant CEMEX, said the company was reviewing the potential to add cyber liabilities and employee’s practice liability to its captive.
“The only implications that we are facing is that we don’t have a significant claims data in those programmes because they are somehow new programmes to us,” he said.
“So, we want to feel more comfortable with time in order to consider having these problems in the captive, but it’s something that will happen in just a matter of time.”
CEMEX began its captive operation in 1997 in Bermuda, but in 2017 it transferred its captive operations to Barbados.
Holschneider revealed that he has worked with captives in the region that can do third-party risks, “and that has been very important to us”.
“Many of them have channels to sell insurance and so there are very exciting cases where we have worked with the owners and enabled them to take on third-party risk for their respective distribution channels,” he said.
Domicile selection
Domicile selection is one of the most important decisions a business owner must make when setting up a captive.
“For every vehicle we build and manage, the domicile is selected around a process that is entirely focused around the future corporate strategy of the client,” Holschneider said.
There is currently no ‘onshore’ captive domicile option in the region, so most Latam companies locate their captives in offshore domiciles, with Bermuda, Barbados and Cayman often being popular choices.
Vermont has recently targeted the Mexican market with an annual trade mission seeking to educate insureds and local brokers about the merits of captive insurance and Vermont as a domicile.
In 2020, Mexican tax reform came into effect whereby captives, as well as other businesses, that are located in low tax jurisdictions may have their tax compared with the corporate rate in Mexico and could be liable to the full Mexican tax rate.
Low tax jurisdictions are those that have an income tax lower than 75% of the rate that would be payable in Mexico, in effect a rate 22.5% or below.
As a result, there is more interest from Mexican businesses in using a US domicile, such as Vermont, where the effective tax rate is higher than offshore and would not incur penalties at home.
“When we do a feasibility study, we then present all options to the client because at the end of the day, they are the ones who decide where to go,” Delgado said.
Holschneider noted that Barbados has been an “amazing” territory to work with for those that have chosen offshore, particularly as they were “early movers” in the Latin American space in terms of building a vast network of dual taxation treaties.
“It is a very compliant offshore jurisdiction that has onshore qualities attached to it,” he said. “Certain territories have certain preferences for domiciles from a legal structuring perspective.”
Holschneider also noted that the company has done “very well” in Cayman, and that it has been a great domicile to work with for certain Latam countries that are considered a “natural fit” for the territory.
“We’ve done great in Vermont, we’ve done very well in South Carolina, and we’ve done okay in Luxembourg,” he added.
Holschneider made it clear that he doesn’t have a predisposition towards any territory, “and we will take the business wherever it makes most sense for the long-term strategic goals”.
Delgado said government entities generally decide to domicile in Bermuda because of its strong reputation, and because the jurisdiction has Solvency II equivalence for commercial (re)insurers.
“When we have smaller captives, for instance, family-owned businesses or just for-profit organisations that perhaps don’t need all the enhanced regulatory requirements that Bermuda has, then they might elect to go to Cayman or Barbados,” he added.
Challenges
One of the biggest challenges Latam is facing as it attempts to increase captive utilisation is the need to educate businesses about captives and the advantages they can provide to a company.
Delgado said that as Latin America is developing, SRS and the wider industry are helping their clients by educating those in charge of management “so that they can decide if they want to pull the trigger or not”.
“Education is key, and managers are now hearing about the benefits of captives,” he added.
Education also needs to be focused on a wider scale than simply targeting businesses, with the process also needing include other key stakeholders, such as governments and regulators.
“In the region, even though technically speaking the people understand the solution, when you talk to regulators and politicians and others, there are gaps in awareness about how captives operate and the public policies that would need to be established in order for this industry to thrive,” Chacon said.
“There is a lack of awareness from the politicians and everybody else and they need to make it happen by creating the public policies in order for this industry to thrive.”
Finding a fronting carrier can also be a struggle, particularly for smaller companies, as it is not always easy to locate an insurer with fronting capacity that is able to issue local policies and adhere to local regulations.
“Some companies have enough leverage, and they have operations in various countries within Latam,” Delgado said.
“They have a better chance of finding that fronting, but when we see small family-owned businesses that want to set up a captive that’s when finding a fronting is the toughest.”
Delgado also highlighted that in Brazil, clients need to have a certain level of denials from the local market to be able to find reinsurance outside of the country, with this issue being one of the main reasons why captives are not always considered a viable solution for Brazilian businesses.
“But we do know that some are proceeding, and we have clients that have set up captives because the local market does not have enough capacity to cover their risks,” he said.