APAC: the preferred den of captives

Captive insurance is one of the alternative methods of risk financing which helps companies lower their Total Cost of Risk (TCOR).

A captive is a licensed insurer whose business consists of insuring or reinsuring the risk exposure of the parent, the affiliates, and/or other entities having a business relationship with the parent.

APAC region is fast evolving as a favorable destination for setting up captives for all lines of business such as Employee Benefits (Life, Health & Disability Insurance), Property & Casualty and Liability Insurance amongst large sized global Fortune 500 organizations. The key lines of business which are insured by most of the large sized companies are pharmaceuticals, constructions and natural resources (oil, gas & mining).

Currently, Asia Pacific region accounts for about 5-8% of the global captives, but is expected to grow manifold in the next 5-10 years due to lower costs and favorable regulatory framework for underwriting risks. The rate of new captives shifting base to APAC countries is expected to grow from 5% in 2015 to around 10-15% in 2020 due to excellent financial infrastructure, growing economy, favorable captive taxation policies and less capital for setting up.

Some of the key captive domiciles in APAC region are Labuan, Singapore and Hong Kong, which are growing at a CAGR of 20-30% in terms of the establishment of new captives. Singapore and Hong Kong have invested significantly in the infrastructure and legislative framework to attract captive formations from large global organizations. Labuan has very strict confidentiality rules and not much is known about the owners of the Captives, their program structure or financial strength.

Operating costs of captive domiciles in Labuan are lower than that of Guernsey or Bermuda. Audit or tax consulting fees are also low. A capital of only MYR 300,000 (less than USD 80,000) is required to start a captive in Lebuan. However, based on the retained risk and insurance program, the capital requirement would be higher in most cases.