THE LATIN AMERICAN CAPTIVE MARKET: AN INSIGHT

The last decade has heralded a turnaround in the fortunes of this vast economic space. Far from being a random event, this breakthrough is the natural outcome of a change in the policies of the governments of the major regional economies, underpinned by a positive evolution in governance, which is becoming deeply rooted. Whereas it is sensible to make allowance for disparities amongst countries, it is also worth drawing attention to a few consistent achievements, such as:

  1. The accession of Brazil and Mexico to the podium of the top ten world economies 
  2. The three decade long process of economic transformation that has converted Chile into a diversified economy grounded on solid levels of internal savings 
  3. The noticeable progression of the Colombian and Peruvian economies, poised to become regional powerhouses 

None of the above would have been possible, had it not been for a decision of the regional leadership to embrace globalisation. This has not been a concerted effort but rather a process of natural progression undertaken by each country individually in response to its own needs and aspirations. There is an ostensible difference between the policies for economic development adopted by nations such as Brazil and Mexico versus those implemented by Colombia and Peru. However, casting differences aside, all these policies have lead to a consistent increase in the flow of direct investment towards the Region and reliance in the foreign and financial sectors as key engines for economic development.

With a market of 550 million consumers, a Gross Domestic Product equivalent to a third of that of the United States and steady rates of growth, Latin America has attained a degree of maturity that warrants the need for sophisticated insurance products. Within this framework, the growth of Latin American based business conglomerates a.k.a. “multilatinas” has been a contributing factor in the demand for new insurance products.

So far, the regulatory frameworks in the majority of countries in the Region have not kept pace with the needs of an ever more discerning clientele. International underwriters and service providers have been flocking to Latin America for decades, bringing with them substantial levels of capacity, innovative products and expertise. Despite this, the arcane nature of the regulation imposed upon the insurance industry has failed to endorse the development of captive solutions. Whilst the impact of these regulatory restrictions cannot be accurately quantified, these limitations have been far from effective as clients have not been deterred from setting up captives offshore.

Multilatinas – “With a market of 550 million consumers, a Gross Domestic Product equivalent to a third of that of the United States and steady rates of growth, Latin America has attained a degree of maturity that warrants the need for sophisticated insurance products. Within this framework, the growth of Latin American based business conglomerates a.k.a. “multilatinas” has been a contributing factor in the demand for new insurance products.”

If anything, the barrage of regulatory limitations has lead to rather convoluted operational layouts that generate unnecessary over costs. In broad terms, Latin American business must purchase insurance coverage from admitted local carriers who in turn might choose to reinsure with admitted reinsurers. As national insurance legislations across the Region do not tolerate non-admitted insurance vehicles, the majority of the captive set ups are condemned for the time being to operate as offshore reinsurers that take up retrocessions from admitted reinsurance carriers. This is hardly conducive to efficiencies and leads to inflated operational costs via the unwelcome introduction of intermediaries, ultimately penalising investors and consumers. In some territories like Argentina and Venezuela there are added regulatory complications that include restrictions to the free flow of currency, leading to yet further complications.

Regional regulatory harmonisation could help sustain the development of the financial sector across Latin America, with a direct impact upon captives. The facts so far, demonstrate that the Region is indeed far from attaining effective levels of transnational consistency. Some of the limitations outlined can nonetheless be mitigated when the captives are registered with the local financial regulators, a painstaking process involving the rating of the captives by recognised credit rating agencies.

Amidst these rather discouraging developments it is important not to loose sight focusing on the underlying facts. The enactment of Article 61 to Law No 1328 in Colombia, easing the requirements for insureds keen to purchase cover overseas for risks not deemed compulsory is an auspicious landmark that should not be overlooked. The Region is however far from a scenario akin to that of the European Union (EU) where EU domiciled captives are allowed to write risks on direct basis across various territories.

Yet despite all these complexities, opportunities abound as the appetite for captive solutions continues to grow amongst regional clients. Whilst the understanding of captive vehicles amongst Latin American operators varies from country to country, the trend points at a progressive modernisation of the regulatory frameworks along with a better understanding amongst clients of the inherent benefits that captives bring about. It is a well known fact that the first Latin American based corporations to adopt captive solutions have been large state owned energy conglomerates. However, as the regional economy took off in recent years, captive solutions have progressively cast their spell across a broader business spectrum. The entrepreneurial culture across the Region is at a crucial stance, experiencing what can be labelled as a true cultural revolution leading to a progressive replacement of patriarchal structures with modern corporate layouts that rely upon good governance, technical innovation, transparency and a growing interest in the attainment of financially viable solutions.

Understand this new trend

The enactment by the US Congress of the Foreign Account Tax Compliance Act (FATCA), the well known Federal law that requires United States persons, including those who live outside the United States, to report financial accounts held outside of the United States. This law also applies to foreign financial institutions that must report upon their American clients to the Internal Revenue Service. The obvious intention of this piece of legislation is to narrow down the potential concealment of offshore assets held by United States taxpayers.

The notorious increase in the number of onshore captive domiciles offering a vast array of facilities for the underwriting of captive business from within the United States, avoiding the complications associated to FATCA.

The 2010 enactment of the Non-admitted and Reinsurance Reform Act of 2010 (“NRRA”), part of the Dodd-Frank Reform and Consumer Protection Act, stipulating that non-admitted insurance is subject solely to the statutory and regulatory requirements of the Insured’s Home State, defined as the State in which an insured maintains his principal place of business or, when all the insured risk is located elsewhere, the Home State is then defined as the State to which the greatest percentage of the insured’s taxable premium is allocated.

The Solvency II European Union (EU) Directive with provisos on the capitalisation levels that insurers must hold to mitigate the risk of insolvency. The attempts by some captive domiciles to enact equivalence provisos to ensure that their legislations retain a degree of symmetry with the premises of this Directive have been vastly publicised. The hype and disarray that have accompanied the many times announced implementation of this Directive have been remarkable and, still it is too early to gauge the extent of the Directive’s impact upon the captive industry. Whereas there is a consensus in the sense that the application of the Directive pillars to the banking and the insurance industry adheres to the principles of financial prudence, good governance and transparency, there has been a recurrent debate about its transposition to the captive industry and its potential fallout. The saga is bound to continue.

“It must be pointed out that Cayman’s own gravitas along with its formidable array of professional resources are a constant magnet for Latin American clients.” 

Within this state of affairs, it is only a matter of natural progression for captives to find their way into boardrooms across the Region.

For decades, the main captive domiciles across the Caribbean and the mid Atlantic catered predominantly for North American and to a lesser extent European business, paying limited attention to the flow of business emanating from Latin America. Only recently there has been a shift in attitude underpinned by a string of factors that have contributed to the modification of an otherwise narrow territorial projection. Whereas these factors are not necessarily interconnected, their sum underlines a trend amongst United States clients that points at a growing re-domiciliation of captives back to the United States from other jurisdictions, along with increased apprehension vis a vis the use of captive domiciles perceived to be “offshore”. The extent to which these developments have dented the business of certain captive domiciles is uncertain but neither can it be ignored nor played down.

The conjunction of these developments with the acceleration in the regional process of economic growth has fuelled the interest in Latin America amongst captive domiciles that for the first time saw in the Region an avenue for their own growth. This scenario also provided a perfect match to those Latin American born businesses that, having attained a level of maturity, yearned for alternative risk transfer solutions not available under their home insurance markets, corseted by out-dated regulatory frameworks. So, all in all, this is a story of two sides brought together by need.

Far from being unaware of the opportunities that this scenario presents, Cayman has been quick to accommodate its priorities, re-affirming its credentials as a captive domicile of choice for Latin American clients. To this end, the jurisdiction’s reputation as a world-class destination keen to uphold a renowned international co-operation regime for the exchange of tax information is broadly acknowledged across the Region. The signature of tax information exchange agreements with 35 jurisdictions, including Mexico, bears witness to this fact. It must be pointed out that Cayman’s own gravitas along with its formidable array of professional resources are a constant magnet for Latin American clients. Cayman’s captive management community is only well aware of the technicalities that are inherent to the various Latin American jurisdictions along with the impact that these could have in the layout of any potential captive structure; this can be hardly played down given the gap in the legal frameworks amongst the key territories in the Region. On account of these facts, it is only natural to envisage a strengthening of Cayman’s position as a preferred captive domicile for Latin American clients in the years to come.

Ultimately, an overview of the jurisdictional responses to the challenges posed by the newly found confidence of some Latin American economies reveals interesting facts. The signature bilateral treaties for investment, exchange in tax information and avoidance of double taxation to name a few, are some of the tools used by the key captive domiciles, including Cayman, to attract business emanating from the Region. It would be naive to expect the future development of Latin American captive business to be an easy proposition. However, for all the intricacies and abundance of barriers facing prospective clients, the times are changing and there is no turning back for the Region that should continue to witness a consistent development of its home grown captives.