Article extracted from: www.captiveinternational.com
Kirk Cyrus of Strategic Risk Solutions, Barbados, reviews some of the countries and regions which have been using Barbados for their captives.
The year 2021 was one of significant growth for captive insurance in Barbados. There were 34 startups and according to the statistics released by the Financial Services Commission (FSC), there were 308 active licensees in Barbados at the end of 2021.
Of that number, 50 percent of licensed entities source their business from Canada, followed by a further 24 percent and 5 percent from the US and Latin America by volume.
Canada established a trade commission in Barbados in 1907. This was immediately followed by the establishment of the major Canadian banks, who all continue to operate to this day. This longstanding relationship, along with access to the country’s international trade agreements in the form of double taxation agreements (DTAs) and bilateral and investment treaties, in some respect explains this foreign direct investment (FDI) from Canada. Barbados has an expanding network of these international trade agreements which offers certain advantages to investors that use Barbados-resident entities to conduct business in other countries.
In recent years, significant growth has been observed from Latin America, a developing market in the captive insurance space. While the overall penetration in that region remains low due to internal insurance regulation around outbound investment, there were nine Latin American startups in Barbados during 2020, followed by a further 11 in 2021, providing evidence of business opportunities.
The term Exempt Surplus was referenced in the Federal Income Tax Act of Canada many decades ago as an export incentive to encourage Canadian corporations to invest overseas and allow for business expansion and growth in Canada when the surplus is repatriated.
This has facilitated the use of Barbados as a captive insurance domicile whereby non-Canadian risk insured by the Barbados captive can be repatriated to Canada free of taxation, under the right circumstances.
Under Canadian tax law, Exempt Surplus is deemed to exist when:
- There is active business income (eg, insurance)
- The foreign income is from a country with which Canada has a tax treaty
- The income is a tax-deductible expense in the country it arises from.
- The income flows through a country (low/no tax) which has a tax treaty or Tax Exchange of Information Agreement with Canada.
From the perspective of a Barbados captive assuming Canadian insurable risks, this is typically on a reinsurance basis through a commercial ceding company and there is no excise tax on the premium. In such circumstances there is a requirement by Office of the Superintendent of Financial Institutions in Canada for the cedant to secure collateral from the unregistered reinsurer in Barbados, to back the ceded reserves. This would typically be in the form of a funds withheld account, a letter of credit, or a reinsurance security agreement.
If cover is available in Canada but this risk is insured directly by the captive in Barbados, the premium is subject to significant excise and provincial taxes, unless approval is sought and obtained from the tax authorities. In any respect, Canadian risks mean that the captive’s profits will be attributed to the parent company as earned, and the parent will be subject to taxation in Canada at the prevailing provincial rate.
The typical insurance business originating from captives with Canadian beneficial ownership include:
- Deductible funding for US workers’ compensation, auto and general liability
- Difficult-to-place coverages in response to market conditions
- Business opportunity (eg, loss litigation)
- Direct write (eg, environmental impairment, trade credit)
- Third party risks (eg, auto extended warranty)
- Insurable risks from mining operations in Latin America
Notwithstanding insurance opportunities for Canadian business with Latin America operations, there has been outbound investment to Barbados from that region in the form of short-tail P&C. Many of the countries (Brazil, Chile, Colombia, Mexico, and Peru) do not permit non-admitted insurance and require double-fronting, consisting of a local carrier and registered reinsurer.
The best example for Barbados has been with Mexico, with whom the “Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains”, was signed on April 7, 2008, and came into effect in 2010.
Barbados’ DTA network includes Canada, Cuba, Panama, the US, and Venezuela within the hemisphere, allowing for FDI from Latin America as well as inbound investment there from other countries, including very strategically Spain and Luxembourg.
Many of the captive startups from Latin America have been in the form of segregated cell companies, as the legislation governing the segregation of assets and liabilities was first introduced almost two decades ago in Barbados. This segment is driven by the ease of setup and has significantly impacted global growth opportunities since 2020. This has been the case for the small and medium-sized businesses seeking alternate risk financing solutions surrounding increasing rates, deductibles, and declining capacity in the commercial market space.
In addition to these captives, Barbados has seen the establishment of reinsurance entities with Latin American beneficial ownership seeking to provide reinsurance capacity to the region. Several of these entities have direct relationships with managing general agents that service their retail and wholesale insurance market.
Irrespective of the source market, the Barbados appeal is the flexibility for licensees to write all major lines, the simplicity of the regulatory framework, and the cost-effectiveness of operating in Barbados.
There are there are three classes of insurance licensees that are categorised and regulated in accordance with their risk profile (Table 1).
Table 1: Classes of insurance licensees in Barbados
Class of licensee
Pure (self-insurance) captives/related party risks (including group and association captives)/low risk
Third party risk/high risk (including segregated cell companies)
Brokers, insurance managers, and insurance holding companies
In Barbados there is a minimum statutory capital at startup of $125,000 for a standalone, plus a further risk capital of approximately 20 percent of premium income.
There is no requirement for Solvency II adherence which is a concern for many business owners in relation to the amount of capital held.
Beyond the horizon
The future of captive insurance in Barbados will be about purpose-fitting the legislative and regulatory framework to bring together the traditional re/insurance market with capital market investors wherever they are located. This will likely involve the intersection of insurance with fintech using captives to enable risk participation by providers of innovative technology to improve risk analytics and management.
The process towards globally accepted standards involves improved financial market sophistication and adequate securities exchange regulation to increase the free movement of capital and foreign ownership of assets.
The Barbados Stock Exchange (BSE) has sought to establish a trading platform to enable the listing and trading of Security Token Offerings, and is designated as a recognised exchange by the UK tax authority. This has been the starting point for using Barbados special purpose vehicles such as captives for risk-sharing, securitisations, and asset transfers.
In May 2022, the BSE executed a master agreement with a leading Canadian fintech, to launch a new blockchain-driven tokenised securities marketplace. The digital asset platform will be integrated as part of the BSE’s International Securities Market.
There has long been the convergence of insurance and the financial markets that will continue as additional capacity is required because of the hardening market. This represents an opportunity to establish insurers with a focus on specialised risks, even if this new capital will not reduce general market pricing.
Further to this, Barbados captives are being established to deal with parametric exposures as a mechanism to determine loss payout following a triggering event. In this way, complicated loss scenarios are being simplified, and focus given to the indemnification of the loss to allow for a shorter turnaround in adjudication and settlement.
The government of Barbados has sought every available opportunity internationally to address the impact of climate change on small developing island states. There must be an opportunity for Barbados to take advantage of the discussion about environmental, social and corporate governance issues and ensure the framework is in place to allow insurance to become an enabler for so-called cleantech innovation.
COP26 has highlighted that there will be the need to protect future intangibles relating to IT innovation, as well as tangibles, once businesses build out their “green” infrastructure and climate technology.
Barbados has remained a trusted jurisdiction based on an established track record of enabling the success of companies established there. The value proposition is in being a reputable and transparent jurisdiction for international business. Well-regulated captives enjoy several benefits, including full and unrestricted repatriation of capital, profits and dividends, thus enhancing global operations and providing a competitive advantage for their owners.
As the country embarks on the latest journey in its social, political, and economic development with a historic transition to a Parliamentary Republic on November 30, 2021, there is every expectation that the proud and resilient people of Barbados will play their part to ensure that the country remains a global participant in attracting sustainable FDI.
This will be accomplished in the typical warm and welcoming climate that is Barbados.