MEED GCC Captive Insurance

THE GCC
CAPTIVE INSURANCE GUIDE
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*References the 2008 Forbes Tax Misery & Reform Index
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The captive potential
aptive insurance, or self insurance, has been a growing trend around the world since its conception in the 1960s. However, its take-up in the Middle
East has so far been modest, with only a handful of firms having established their own captive subsidiaries over the last decade.
Despite this, there is growing momentum for the creation of a greater number of captives as the insurance sector in the region becomes more sophisticated and the size and, subsequently, risk requirements of companies increases. In parallel, the three GCC domiciles with captive legislation, Bahrain, the Qatar Financial Centre and the Dubai International Financial Centre, and their associated regulators are evolving to better meet the needs of regional companies looking at captive insurance. The greater presence of captive managers, such as Marsh and Kane, is also having a positive impact. This MEED Insight report, published in association with the Qatar Financial Centre Authority, highlights the captive insurance concept and the many benefits it can bring companies that wish to have a better understanding and control of their risk profiles. Its aim is to provide a comprehensive overview of the captive insurance industry from a regional perspective, which will help inform companies about what is an increasingly popular insurance model.
Chapters
04 The captive concept 12 The regional captive market 20 The case for captives in the GCC 34 Quantifying the GCCs captive market potential 36 Prognosis 37 Global Star case study 39 Mubadala case study
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QFCA | 3
The captive concept

I
nsurance is one of the worlds oldest industries, with evidence of the first basic risk management techniques dating back more than 2,000 years. From the 14th century when the Genoese created the first separate insurance contract, it is an industry that has become ever more sophisticated, with different types of cover created to meet society and commercial needs such as fire, disability, accident and life insurance. In recent years, the captive insurance solution has grown to become an increasingly important dynamic of the insurance industry.
A captive is a legal entity created to insure the risks of its parent firm or group of companies
History
In the 1950s, Frederic Mylett Reiss, a US property insurance engineer, was working for a client who wanted to insure its coal mines. These were described by the client as captive mines because their sole purpose was the production of coke and iron ore feedstock for the manufacturing of steel, the clients main line of business.
The problem, as recounted by Reiss nephew, was that the premiums had increased substantially and the client was facing up to the fact that it would have to dramatically cut back on its research and development budget to pay the premium. After some intense negotiation with insurers, Reiss succeeded in obtaining a reduced premium from the UK-based Lloyds, but only on the condition that a third party in the US would provide loss prevention and risk management. Reiss came up with the idea of incorporating a company fully owned by the client whose sole purpose was the insurance of its owner. It is from this idea that the worlds first captive insurance firm, Steel Insurance Company of America, was born. Because the new firm would insure only the coal mines and therefore only the risks of their owner, it was described as a captive insurer. The term then stuck.
Historically, captive insurance is still a relatively new concept that has so far had limited take-up in the Middle East, but the basic premise behind it is simple. Essentially, a captive insurance company more commonly shortened to just a captive is a legal entity created to insure the risks of its parent company or group of companies with the aim of reducing the total cost of risk and seeking a greater control over their risk profile. Captives are set up for a variety of reasons ranging from a desire to reduce premiums due to the capturing of underwriting profits and investment income to a lack of tailored risk management options from the conventional insurance market. Today, the industry is a multinational business worth tens of billions of dollars. Altogether, there are more than 5,600 captive insurance firms globally. More than 65 per cent of all Fortune 500 companies have captive subsidiaries, while recent estimates have calculated that the captive insurance market has more than $30bn in annual premiums and more than $130bn in assets globally. Such has been its growth that in most developed markets, having a captive subsidiary has become the norm rather than the exception among the worlds largest companies as the graph on the right illustrates.
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Captive usage among international major indices (%)
100 80 60 40 20 0
100
80
60
40
20
w Do
Jon
es
30 FT
SE
0 10
C4 CA
0 OM
X3
BE
L2
X DA
30
X AS
50
NI
K2
25
Does use a captive
Does not use a captive
Source: Marsh www.meedinsight.com
The simplest captive structure is when a captive is owned by a single parent company
there, captive insurance took off, initially in certain Caribbean countries, then the US and over the past 20 years all across the world.
owner. Single parent captives can also insure related or unrelated third-party risk up to a certain limit.
types of captive
There are several different types of captive structures that can be employed. Typically, they can be distinguished in two separate ways: by their ownership structure; and their operating structure.
group captives
Should the parent company have a number of different subsidiaries, a captive can be established to insure the risks of the parent and its group businesses. Such a structure is described as a group captive arrangement.
ownership structures single parent captives

Realising the potential opportunity for capitalising on his captive insurance concept, Reiss went on to set up the International Risk Management Group in Bermuda in 1963. From Captives can be set up by a number of different entities for a number of different reasons. The basic level is the single parent captive where the captive subsidiary insures the risks of its
Association-owned captives
Association-owned captives are captives established to cover the risks of members of mutual associations, such as doctors and lawyers associations, where individuals frequently carry the same risks and where it makes sense to pool this risk.
Structure of a single parent captive

insurance premiums Business insurance coverage
Source: MEED Insight
industry captives
Similar to association-owned captives are industry captives, where companies in a related sector or industry form a captive to insure risks inherent to the industry in which they work.
CAptive
operating structures
Depending on the location of the captive and its owner/s requirements, the captive, whatever its ownership, may operate in different manners.
Structure of a group captive
the direct-writing captive

group Business 1 Business 2 Business 3 premiums CAptive insurance policies
The direct-writing captive will directly write and word the insurance policies of its owner/s. It receives the premiums directly and has to pay its parent directly in the event of a claim. The captive can choose to retain all the risk or cede all or part of it to a commercial reinsurer.
the reinsurance captive

In some instances, local laws and regulations prohibit insurers from underwriting business activity if they are not licensed to provide such services in that country. In these instances, the parent can use a locally licensed third-party insurer to issue the policies. The captive then acts as a reinsurer by acquiring all or part of the risk and premium and can then in turn cede the same to another reinsurer. In other cases, especially where a parent has many subsidiaries in different countries using local insurers, the captive acts as a reinsurer by taking on the third-parties risks, in effect pooling the risk of the subsidiaries. The captive can again choose to retain or cede the risks to another reinsurer.
QFCA | 5
Structure of a captive with a separate fronting insurer
premiums pArent CompAny insurance risk

Source: MEED Insight www.meedinsight.com
premiums Fronting CompAny insurance risk CAptive
the gCC CAptive insurAnCe guide

protected Cell Company
A Protected Cell Company (PCC) is a single legal entity consisting of a core, with its own core assets, and an undefined number of cells, with their own individual cellular assets. Each cell within the PCC can be employed as a captive, with its shares owned by its parent. To operate, each cell is typically required to be authorised as a class of captive defined by the regulator. Managed by a single board sitting at the core level, a PCC is structured in such a way that each individual cell is legally ring-fenced from another. As such, each cells assets cannot be used to meet any other cells liabilities. The core maintains assets that can be used to meet liabilities that cannot be attributed to one cell alone. Generally overseen by a captive insurance manager, the core is the legal entity of the PCC and has the ability to issue cell shares. One of the principal benefits of a PCC is that it enables smaller companies to utilise a captive solution without having to allocate large amounts of capital that a single parent captive requires. Similarly, companies do not have to go through the process of setting up a new company and appointing a board of directors. For that reason, PCCs offer what is known as a Rent-a-Captive arrangement. A PCC is often referred to as a rent-a-captive, says Peter Hodgins, an insurance specialist at UK law firm Clyde & Co. The management of the core is typically the responsibility of the captive manager. The core has to look after the collective interest of all the cells and it tends not to be appropriate for one of the individual cells to have management control over the core as this can potentially create conflicts of interest. The cells themselves should be independent. You deliberately want to keep them as segregated entities so as to avoid cross-liabilities. To try to interlink cells is a bad idea. The cells relationship with the core manager is dealt with through simple subscription agreement. PCCs are very useful as they lower the entry points for a captive solution. You dont have to be spending as much on premiums to justify utilising a captive structure through a cell in a PCC. Its also worth noting that PCCs are not merely limited to insurance; you can use them as a way of raising pension funds for example. They are entities that offer a fair degree of flexibility. In a market that needs to be educated on
6 | QFCA
Structure of a protected cell company
Cell
Cell
Cell
Core
Cell
Cell
Cell
Religious insurance: Sharia-compliant captives only invest in products that adhere to sharia rules
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photograph: dreamstime
Protected cell companies are very useful as they lower the entry points for a captive solution
insurance as a whole, particularly in the captive space, a PCC is a great way to do that.
sharia-compliant captives
Sharia-compliant captives, commonly also known as takaful captives or self-takafuls, operate in a similar manner to conventional captives. The exception is that the sharia-compliant captive only invests in investment products that are sharia-compliant. They must also employ a sharia advisory board and can only be reinsured by sharia-compliant reinsurers, or retakafuls.
Compared with a conventional insurer, a captive firm has lower overhead costs
arial data, implement uniform accounting procedures and speed up the claims handling process through improved bureaucratic procedures and the ruling out of the need for third parties. As Akshay Randeva, director of strategic development at the Qatar Financial Centre, explains: There is an increasing realisation amongst most corporates with a focus on risk management that conventional risk transfer solutions are not sufficient either from a coverage of risks point of view or from the view of the economics of the risk transfer. Advantage: The most obvious benefit to setting up a captive is the potential of lower insurance premiums For example, if we take Qatar Petroleums historical loss record and compare it with [UK-based] BPs, it is much lower. So, for companies in that situation, the question is why am I paying the same premium? Shaun Brook of US-based captive management specialist Kane supports this premise. What a captive provides is a means of retaining risk in a structured environment, which offers multiple financial, risk and claims management benefits based on solid corporate governance principles. The captive is a way to facilitate risk management, creating a central mechanism for controlling risk within the organisation. While there is a growing appetite among leading regional insurers to retain greater amounts of risk and reduce the volume ceded out of the region, the Middle East market is primarily dominated by international insurers. Exposed to volatile international markets and restricted by the limited range of insurance products available to them, many well-run operations in the region are forced to subsidise poorly managed organisations in other territories through paying above-average premium contributions relative to their risk exposures. The captive provides companies with an opportunity to create a risk transfer scenario
QFCA | 7
Benefits of establishing a captive insurance subsidiary

The benefits of setting up a captive insurance unit are derived from both a financial and insurance perspective.
Commercial advantages:
The most obvious benefit to setting up a captive is the potential of lower premiums. Compared with a conventional insurer, the captive has considerably lower overhead costs and any underwriting profit or unclaimed premiums can be retained by the parent. Having a captive also gives the parent firm the ability to tap into the lower cost international reinsurance market directly. This enables the captive to determine the amount of risk it wishes to take on and how much it would prefer to be reinsured. When it comes to making claims, the owner avoids the lengthy and often bureaucratic process that it will encounter with third-party insurers.
to a captive are tax deductible. However, given that the GCC is largely tax free, this is less relevant to captives set up in the region by regional firms, although it may be pertinent if they operate and own overseas units in jurisdictions which do impose taxation. A captive could potentially begin offering its insurance services to third parties, provided it has the right licence, thereby providing an additional revenue stream.
Insurance advantages:
A captive can tailor policies for its parents exact requirements. Conversely, the parent does not have to pay for elements of policies it does not need, which is often the case with insurance cover from the commercial market. Having a captive improves the parent companys negotiating position with conventional insurers. The larger the size of the captive, the greater its ability to take on its parents risks, conversely reducing the owners dependence on conventional insurance. Captives enable the parent to allocate its costs among its profit centres, build up actu-
The captive can use unpaid claims for investment purposes, the profits from which can then be passed back to the parent. There are certain tax advantages to having a captive as in most domiciles premiums paid
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that is more commensurate with their levels of assessed exposure. Captives can also carry their potential disadvantages, which need to be considered prior to opting for the captive insurance route. The parent has to commit a portion of its capital to the captive to ensure that the captive can meet its commitments in the event of claims being made. How much capital has to be allocated is dependent on the domicile and type of captive. Companies must consider that this capital may not provide the same return as if they themselves had invested in their own operations, although most regulators allow for a portion of their capital to be loaned back to the parent. Captives require a certain amount of set-up and operating costs. The parent will need to invest in a feasibility study, licence, regulatory, legal and auditing fees and pay for the management of the captive, normally a thirdparty insurance manager, such as Marsh. Captives need management commitment from the parent.
There is always the possibility, no matter how small, of adverse results from the captive
establishing a captive
There are several steps a company should go through before making the final decision to establish a captive. Perhaps the most important is the feasibility study. Normally carried out by an established captive insurance specialist, such as Marsh, AON or Kane, the aim of the feasibility study is to determine whether a captive would be the right choice for the parent and then to determine what captive structure to employ. Legal, financial and accountancy advice may also be taken at this stage. The feasibility study identifies the parents strategic aims and its tolerance to risk. This is followed by the collection, manipulation, and analysis of loss data and exposures. Once complete, the study will examine the best captive structure to be employed, the appropriate levels of retention for it, the most suitable domicile, potential costs for setting up and operating the captive, plus a cost/benefit analysis to assist in the final investment decision. If the decision is made to go ahead with the captive, then the next phase would be the process of establishing the new firm. This will
As with any insurer, there is always the possibility, no matter how small, of adverse results from the captive due to higher-than-expected claims. While captives are designed to minimise their parents risk, they can never completely eliminate it. Should a captives capital decrease as a result, the parent may find itself having to inject additional capital into it, although this risk is reduced by arranging a proper reinsurance programme. Weighing up the respective merits and disadvantages of a captive is crucial for any company before commencing any formal process towards establishing one.
The captive establishment process
3-6 months
initial decision to explore establishment of captive subsidiary engagement of captive insurance specialist to carry out feasibility study to assist in making final investment decision selection of domicile, appropriate levels of retention and captive structure
3-6 months
incorporation of captive, selection of board, appointment of advisers registration of captive at selected domicile, payment of application fees and allocation of base capital
3 months
Finalise business model, complete application process with regulator and register company Complete operational set-up
8 | QFCA
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include the selection of the captives board members, the appointment of legal, auditing and insurance advisers, preparation of the application papers for the selected domicile, the incorporation of the captive and finally the creation of the registered office and compliance to any other legal and regulatory requirements. The starting point is always the feasibility study to determine whether the captive solution is appropriate for your business, says Hodgins. There are a number of captive managers that can assist the company with this decision, and some large businesses often have sufficient in-house expertise provided by insurance managers/purchasers. Generally, I think that if you are spending between $1m and $2m on insurance premiums, then the chances are that captive insurance can offer you some level of efficiency within your business. Thats not to say that if you do not have that level of premium spending, there are no captive solutions that may work for you typically through PCCs, however. The questions to ask are, is it the right thing for me and does it work? I say that would typically be done with the captive manager who would go with you through the details of your business, its risks and insurance needs and who would then put forward a proposal. The second consideration would then be about which jurisdiction to set up the captive insurer. Depending on the nature of the entity in question, the analysis of the appropriate jurisdiction can be a very broad choice. There are obviously a number of countries with very strong captive regimes. What you are looking at from a jurisdictional perspective is the appropriate domicile for the captive. There is no one-size-fits-all answer to that question. You will typically be looking at where the centre of the gravity of your business operation is, whether it has operations in the jurisdiction where the captive is to be established and managed, and other such practical considerations. Then there are the tax consequences. If you have to pay claims within jurisdictions that impose taxes, then this will be an issue for consideration. While tax can be less of an issue in the Middle East region, you must look at where
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Captive operational functions
Parent corporation or association
Captive board
Management company
Auditors Investment managers
Auditors
Regulators
Bankers
Source: Marsh
the entities operate. Some of these mega-conglomerates operations are not confined to the GCC. Thats why its important to analyse the risks they face and the jurisdiction in which they operate. Establishing a captive is not necessarily a quick process and companies should be prepared to put in a fair degree of effort to ensure the right domicile, advisers, and structures are employed. The fastest you can get it done is three months from the point you have made the decision to set up the business, says Hodgins. There is a period of time you would need to put the documents together and a process wherein you would be dealing with authorities. Typically thats the fastest you can go, as the regulator would not give the approval before at least 50 days. But it can take far longer than that. The feasibility stage is not necessarily a quick process. It can take months to do depending on the complexity of business you are dealing with. So for the set-up process, I say three months from when the decision is made at least, but you might realistically be looking at six months. The simple reason for that is information that needs to be put together. While the advisers can play their bit, the speed of the process depends very much on the client.
Operating the captive

Overall control of the captive is exercised by its board of directors selected by the parent company or association. The board will appoint a captive manager to run the captive. In turn, the captive manager will appoint other professional service providers such as law firms, accountants and financial advisers. The insurance management firms carry out the day-to-day operations of the captive, providing the necessary insurance expertise that the captive requires. This is particularly important, given that captives are often formed by parent companies with limited insurance experience. In specialised areas such as captive insurance, having the right captive manager is crucial. The captive manager will perform a number of important functions, ranging from underwriting policies issued by the captive, claims handling and settlement to preparing management reports and ensuring the captive remains compliant with the laws and regulations of the domicile in which it is located. Currently, there are three main insurance managers focusing on captives in the region: UAEbased Marsh, Bahrain-based Ensurion and Kane, which is so far the first captive manager to be licensed and authorised by the Qatar Financial Centre Authority. As the captive concept gains popularity in the region, more captive managers are expected to establish themselves in the respective domiciles.
QFCA | 9

eligibility
One of the most attractive aspects of captive insurance is that it can apply to any company or industry. Its application is not limited solely to companies. Mutual associations or groups of employees such as pilots, lawyers and doctors could also pool their resources in the formation of a captive. Generally, the view among captive experts is that any company with annual premiums in excess of $1m is in a position to consider establishing a captive. Firms with premiums lower than that would not necessarily benefit financially from a captive as its operating costs would outweigh the financial advantages that it would bring. In the GCC, this premium threshold would probably be higher as Ronny Vellekoop, Head of Marsh Management Services (Dubai) Limited, explains: The main criterion for a company to set up a captive is to have a minimum premium volume so that the captive can meet its operating expenses. As a rule of thumb, for example in Europe, if you have a minimum $1m of premium, you are in a position to think about starting a captive. But because the premiums are generally lower in this region, I would say the minimum you should start looking at should probably be about $3-5m in premiums for a captive to be able to operate and meet its operating expenses. Data from Marsh highlights that every industry, without any particular distinction, employs captives. Ultimately, every company requires insurance and this commonality is reflected in the broad utilisation of the captive concept in each sector. However, this does not mean that captives are suitable for all types of businesses warns Brook. The [captive] mechanism is ideally suited to those organisations which operate a robust balance sheet, he says. The firms should also be profitable, operate from a stable base and have a high level of understanding of their risk exposures, resulting in an above-average risk profile. Running risk through a captive requires both capital and appetite. However, if a firm employs sophisticated risk-modelling techniques, has conducted a detailed analysis of its overall exposures and is capable of pricing those exposures accurately, then the benefits of operating a captive will quickly become apparent.
10 | QFCA
Captive utilisation by sector of parent company

Aviation and aerospace Chemicals Life sciences Mining, metals and minerals Real estate Construction Automotive Financial institutions
Values (%)
20 11 10 10 8 7 6 6 6 3 3 Healthcare 3 3 Retail and consumer products 2 2
Technology and telecoms
Transportation
%
Other Power and utilities Manufacturing
Source: Marsh
Business underwritten by captives
Health/Medical Marine Product liability Financial products Property damage
Values (%)
20 18 15 12 9 8 6 4 4 4
Professional indemnity
Auto liability
%
General/third party liability Other
Employers liability/ workers compensation
Source: Marsh
Just as broad are the types of risk that captive insurance covers, ranging from auto liability insurance to professional indemnity. This flexibility that captives provide has been one of the main driving forces behind the industrys rapid growth in recent years. Captives can be applied to most areas of insurance if the risk is clearly defined, says Brook. Such areas may include product and operating liability; terrorism and natural haz-
ards; motor; professional indemnity; employee liability; contractors all risks; property liability; and business interruption liability. Captives are also taking on higher limits and looking at new products and lines. For example, some companies are now looking at channelling their employee benefits through the captive, including group term life insurance and long-term disability. Captive are also increasingly being considered for more esowww.meedinsight.com
teric risks that are harder to place in the standard market, such as reputational risk. With the implementation of mandatory health cover in the region, the potential for captives as a means of providing corporate medical insurance is increasing. There are already a significant number of self-administered schemes in place in the region, but at present they are not structured as captives. Vellekoop agrees. You can take in every risk in a captive, he says. This includes property, liability, pollution, fire, medical, accident, marine and aviation. The exception is directors and officers liability because it provides legal assistance cover for directors being sued either by shareholders or by investors. If the corporate shareholder, who also owns the captive, is suing the director for mismanagement or misconduct and the director subsequently gets his legal expenses covered by the captive, it will be conflict of interest. For that reason, directors and officers liabilities are not usually covered by captives. These views are supported by Marsh data highlighting that all types of insurance cover are provided by captives, with property damage forming the largest proportion of business underwritten, followed by general and thirdparty liability. Similarly, there is no distinction between the types of companies that can employ captives. Publicly listed companies comprise the majority of captive parents globally, followed by private companies of which there are more than 2,000. The latter includes family-owned firms and those owned or controlled by the state. The type of company really doesnt matter, says Vellekoop. The only thing the company needs to have is a risk management culture. If they dont and if they just want to keep things simple by transferring risk to the commercial insurance market, then a captive would not be appropriate. This is an important fact due to the preponderance of family-owned and governmentcontrolled business in the region. Although only a few firms in the region have set up a captive so far, they represent all types of business, ranging from state-controlled firms such as Saudi Aramco and government-owned Dubai Holding, to listed companies such as Tabreed
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The main captive domiciles

Cayman Islands Isle of Man US-South Carolina Bermuda Singapore
Values (%)
29 15 9 8 6 5 5 5 5 5 3 3 US-Vermont 2
Barbados Ireland
US-Hawaii Other (US)
%
Luxembourg Guernsey
Other (Countries)
Source: Marsh
Publicly listed companies form the majority of captive parents, followed by private firms
and even individuals such as Ruan Janse van Rensburg and his Global Star PCC. Provided there is sufficient scale in the business, I think that a captive can work with any type or kind of business/sector, says Hodgins. There are very common risks that can be insured by the captive that every business has. Everyone has got property and employees, and every business runs the possibility of incurring a liability with a third party. Its really more a function of scale than sector or type of firm. Vellekoop agrees. Captives can be in any industry, he says. Sometimes you see them in an industry you have never thought of. You see them everywhere. Globally, the financial services industry has the largest number of captives. Likewise, pharmaceuticals, infrastructure and telecoms are significant captive users. In the GCC, it is more difficult to say at this stage, but there is a trend
for energy-related companies, especially those with significant oil and gas interests, to form captives. When you think that the region has more than 60 per cent of the proven oil reserves in the world, then this is an area that has obvious potential.
Domiciles
A captive can only be established in domiciles that have passed laws and regulations permitting them. Currently, there are more than 70 onshore and offshore domiciles around the world offering captive insurance licences. Of these, the largest is Bermuda, where Reiss set up the first captive management firm, followed by the Cayman Islands and then the US state of Vermont. A total of 23 other US states have captive insurance regulations in place. Generally, but not always, companies tend to set up captives within the continent in which their headquarters is based as they prefer their captives to be licensed in a location within reasonable travelling distance of their headquarters. Each domicile offers different regulations such as lower licensing costs and capitalisation requirements. Some are popular for their flexible regulatory regime, while for others, the presence of a robust regulator with a good track record is the key selling point. Offshore domiciles also offer several tax incentives.
QFCA | 11
The regional captive market

Middle East domiciles
There are currently three domiciles offering captive insurance licences in the GCC: Bahrain, under licence from the Central Bank of Bahrain; the Dubai International Financial Centre (DIFC); and the Qatar Financial Centre (QFC). Recently, Jordan became the first Arab state outside the GCC to establish a captive regime under the authority of the Insurance Commission of Jordan. All domiciles have a regulator to oversee and regulate captives, ensure they function and act within the bounds of legislation and rulebooks set by the regulator itself and make sure they operate to the highest standards of financial governance. In the case of the DIFC, the regulator is the Dubai Financial Services Authority (DFSA). In Bahrain, it is the Central Bank of Bahrain, while in Qatar it is the Qatar Financial Centre Regulatory Authority (QFCRA). A more detailed look at the regulators position can be found on pages 16-17. In Qatar and Dubai, there is additionally the QFC Authority and the DIFC Authority, which are responsible for the development and enforcement of regulations not falling under the remit of the QFCRA or DFSA. Typically, these regulations cover employment, arbitration, insolvency, companies, contracts and data protection rules, plus civil and commercial disputes. All three GCC captive domiciles are similar in some respects in that application, annual fees and base capital requirements only differ by a small amount in each domicile and in some cases not at all. The DIFC and QFC for example two domiciles that may be considered the regional heavyweights in this area have largely the same definition for the first three classes of captives. However, in a number of other areas, there is a divergence in the regulations. The trend is for this divergence to grow as the domiciles attempt to differentiate themselves to the currently limited captive insurance market.
12 | QFCA
its Captive Insurance Business Rules (CAPI) 2011 in early July this year, which saw the lowering of base capital requirement costs for Class 2 captives from $1m to $400,000. It also resulted in the creation of a new Class 4 captive that enables the formation of nonconventional captives, which do not meet the criteria of the other classes, but which the QFCRA believes can operate effectively. The new class is a first for the region and offers a degree of flexibility in captive structuring that was till now formally unavailable. The move has been welcomed by the specialists. Effectively, the cluster [Class 2] captive only allows you to write 20 per cent of nongroup business, says Hodgins. But if youre looking at joint ventures, you are not just looking at the group anymore. The revised regime at the QFC potentially allows some scope to allow industry style captives, where people with similar interests will have a shareholding in the captive. This has previously been a potential stumbling block for the joint venture structure: whether or not you want to have shares with every joint venture member. From the regulator perspective, this kind of structure is not a bad bet. Who best understands the risks of a joint venture than the partners themselves? The captive providing insurance could probably do at least as good a job if not a better job than a commercial insurance company. In another regional first, the updated CAPI permits banking letters of credit (LoCs) to be used as a form of eligible capital for potential QFC captives. This was an important step forward in the development of captive insurance in the Middle East as reinsuring captives have had to make payments in the past to an escrow account, used as collateral against failure to pay its obligations to a fronting issuer. The problem with the escrow set-up is that the captive has no control over the investment or little right to earn income from it.
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GCC domicile: Dubai International Financial Centre
There are three domiciles offering captive licences in the GCC: Bahrain, the QFC and the DIFC
For instance, DIFC-domiciled captives are not allowed to insure risks outside the domicile, while those in the QFC and Bahrain can. Likewise, DIFC captives have to be based in the DIFC district, while there is greater flexibility, and lower rents, for captives in Bahrain and Qatar in deciding where to locate. Perhaps the best example of a growing regulatory divergence was the QFCRAs updating of
Comparison of GCC captive domiciles

Qatar Financial Centre Licences available
Class 1 Captive: A single parent company that writes only contracts of insurance in respect to risks related to its owner and/or affiliates Class 2 Captive: A captive that can write up to 20 per cent of gross written premium from third-party risks, in addition to the risks of its owner and/or affiliates Class 3 Captive: A multi-owned captive underwriting only the risks of its owners and/or affiliates, usually within a specific trade or activity Class 4 Captive: A non-conventional captive, established by the QFCRA, that does not meet the requirements of other captive classes, but which satisfies certain QFCRA criteria on operating effectively Protected Cell Company (PCC)
Dubai International Financial Centre

Class 1 Captive: A single parent company that writes only contracts of insurance in respect of risks related to their owner and/ or affiliates Class 2 Captive: A captive that can write up to 20 per cent of gross written premium from third-party risks in addition to the risks of its owner and/or affiliates Class 3 Captive: A multi-owned captive underwriting only the risks of its owners and/or affiliates, usually within a specific trade or activity Protected Cell Company [PCC]
Central Bank of Bahrain

Captive insurance
Base capital requirements
Class 1 Captive: $150,000 Class 2 Captive: $400,000 Class 3 Captive: $250,000 Class 4 Captive: $1m Non-cellular PCC: $50,000
Class 1 Captive: $150,000 Class 2 Captive: $250,000 Class 3 Captive: $1m Non-cellular PCC: $50,000 (each cell must also have base capital of $50,000)
Class 1 Captive: BD75,000 Class 2 Captive: BD300,000
Application fees
Captive Classes 1-4: $5,000 PCC core: $8,000 Individual PCC cell: $1,000
Captive Classes 1-4: $5,500 PCC core: $8,000 Individual PCC cell: $1,000 As application fee 0.1 per cent for each $1m of expenditure
BD100
Annual fees Other fees
As application fee At discretion of QFCRA dependent on complexity of supervision No restrictions on foreign ownership No restrictions on QFC-domiciled captive insuring risks in Qatar
BD1,000
Ownership Insurance outside the domicile Location Solvency margin requirements Reserve requirements Taxation Regulation regime
No restrictions on foreign ownership Can only insure risks within the DIFC
No restrictions on foreign ownership No restrictions on insuring risks in Bahrain
Captives can be located anywhere within the Qatari borders Captives must maintain a minimum capital equal to or greater than their base capital requirement or what is determined by a risk-based capital calculation None Tax exemption for captives The QFCRA is responsible for the supervision of captives. Regulations outside the QFCRA remit are enforced by the QFCA. Civil and commercial disputes are handled by the QFC Civil and Commercial Court
Captives must be located within the DIFC district Captives must have adjusted capital resources greater than the amount determined by their minimum capital requirement None Tax free for first 50 years of operation Regulation of captives is overseen by the DFSA. Regulations outside the DFSA remit are handled by the DIFC Authority. Civil and commercial disputes are handled by the DIFC courts
Captives can be located anywhere in Bahrain Must be equal to or greater than the base capital requirement 10 per cent of annual profits None The Central Bank of Bahrain handles all regulations. Two separate tribunals deal with any civil or commercial disputes
$1=BD0.376. ICJ=Insurance Commission of Jordan; QFCRA=Qatar Financial Centre Regulatory Authority; QFCA=Qatar Financial Centre Authority; DFSA=Dubai Financial Services Authority. Sources: MEED Insight; Marsh; Kane; QFCRA; DFSA; ICJ; Clyde & Co
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QFCA | 13

The move means firms looking at setting up a captive will potentially have more flexibility in meeting the subsidiarys capital and collateral requirements. Whats more, although the new rule changes only specifically reference LoCs, the QFCRA has the discretion to permit other forms of eligible capital. Ultimately, there are a number of factors companies have to consider when choosing a domicile. The specific benefits afforded by any particular domicile will depend on the requirements and circumstances of the individual client, says Brook. In order to assess the particular advantages or disadvantages of a location, it would be necessary to conduct a full feasibility study for the particular client. I would, however, add that each of the domiciles in the region has put in place a robust legislative framework for captives, which is based on the best practice elements laid down by some of the longest standing players in the captive arena. These regimes are ably supported by proactive regulatory authorities keen to make the sector an integral part of their overall financial services. In addition, they offer a range of world class service providers and highly sophisticated infrastructure to ensure that all the key components of a successful captive market are in place.
existing captives
Captive insurance has been growing steadily in the Middle East since the establishment in 1999 of the Compagnie dAssurance des Hydrocarbures (Cash) in Algeria as a group captive owned by the Ministry of Energy & Mines and the Ministry of Finance. Its initial role was to insure the projects of Algerias state-owned energy company Sonatrach and its third-party joint venture partners, but it has since branched out to insuring other statefinanced capital projects and insurance to members of the public. As such, it is a good example of a captive that has grown beyond its original remit into a standalone insurer in its own right. Cash was followed in 2001 with the establishment of Bermuda-based Stellar Insurance, the wholly owned special purpose captive insurance vehicle of Saudi Aramco, a Class 3 insurer which has a capitalisation of more than $500m. At the same time, Sabic established its own captive, setting up Sabic Captive Insurance (Sabcap) in the domicile of Guernsey.
14 | QFCA
Algiers: The group captive launched in Algeria in 1999 grew into a standalone insurer in its own right
The increase in the number of captives points to the fact that interest in the concept is gaining momentum
shares in GIS were transferred to the public in an IPO. Although Al-Koot is no longer strictly a captive of QP, it still effectively acts as if it were the national oil companys captive insurer and acts as a consultant on its insurance needs. Al-Koot was a landmark in the development of captive insurance in the region, but equally important was the formation in 2007 of Tabreed Captive Insurance Company (TCIC), the wholly owned captive of Abu Dhabi-based district cooling firm Tabreed. The new captive was established in co-ordination with Ensurion, the Bahrain-based insurance management company. Under licence from the Central Bank of Bahrain, TCIC was key in the development of captive insurance in the region, serving as a catalyst for several other companies to follow suit. District cooling is a capital intensive business requiring large amounts of investments, says Mohamed Saif al-Mazrouei, chairman of Tabreed, explaining the rationale for setting up
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The first captive in the Gulf region itself was set up in 2003 by Qatar Petroleum (QP) when it founded Al-Koot Insurance & Reinsurance Company as its 100 per cent owned captive subsidiary. Self-managed, Al-Koot remained the captive insurer of QP until 2007 when ownership of it was transferred to Gulf International Services Company (GIS) as part of a privatisation process, in which 70 per cent of
TCIC. The long-term, asset-intensive nature of our business requires that we excel in financial planning and risk management. Next to be created in 2008 was Dubai Holding Insurance Services PCC, a protected cell company licensed and regulated by the DIFC, with Dubai government-related entities Jumeirah Group, Tatweer Dubai, Tecom Investments, Sama Dubai and Dubai Properties as the cell shareholders and Dubai Holding as the core shareholder. US insurance giant Marsh is the captive manager. Another interesting development took place a year later with the establishment of Masheed Captive Insurance Company, the captive subsidiary of Saudi Readymix Concrete Company.
Like TCIC, it is licensed and regulated by the Central Bank of Bahrain and managed by Ensurion. Masheed was the first case of a regional firm electing to establish a captive in a GCC domicile different from its own geographical location. While Saudi Arabia has long been looked upon as an ideal location for captives, the government has not yet issued any regulations permitting captive activity in the kingdom. A number of other captives have been established over the past two years, including MDC (Re) Insurance and ACWA Power Reinsurance Company, both at the DIFC. While the development of captive insurance has been slow to pick up in the region, the increase in the number of captives points to the fact that interest in the concept is gaining momentum.
Riyadh: Saudi Arabia is yet to permit captive activity
Captives owned by GCC companies

Captive Stellar Insurance Domicile
Bermuda
Parent
Saudi Aramco
Headquarters of parent
Saudi Arabia
Year established
2001
Captive manager
Not available
Type of captive
Single
Paid-up share capital ($m)

Not available
Remarks
First overseas captive established by a regional company
Sabic Captive Insurance Company Al-Koot Insurance & Reinsurance Company Tabreed Captive Insurance Company Dubai Holding Insurance Services PCC Masheed Captive Insurance Company MDC (Re) Insurance ACWA Power Reinsurance Company Global Star PCC
Guernsey
Sabic
Saudi Arabia
2001
Not available Selfmanaged
Single
Not available
Qatar
Qatar Petroleum
Qatar
2003
Group
Not available
Following privatisation in 2007, it is no longer strictly defined as a captive First regional captive by a nonenergy sector parent First protected cell company in the region First captive set up in the region by Saudi parent
Bahrain
Tabreed
UAE
2007
Ensurion
Single
2.2
DIFC
Dubai Holding Saudi Readymix Mubadala ACWA Power International Ruan Janse van Rensburg Kuwait Petroleum International
UAE
2008
Marsh
Protected cell company Single
Not available
Bahrain
Saudi Arabia
2009
Ensurion
1.6
DIFC DIFC
UAE Saudi Arabia
2010 2011
Marsh Marsh
Single Single
2 0.8
DIFC
NA
2011
Marsh
Protected cell company Single
0.3
First protected cell company in the region owned by an individual Only captive owned by a Kuwaiti parent
Woodstock Insurance Company
Isle of Man
Kuwait
Not available
Aon
Not available
DIFC=Dubai International Financial Centre; NA=Not applicable. Source: MEED Insight www.meedinsight.com QFCA | 15
The regulators position

New regulatory framework
As the officials responsible for developing new captive insurance regulation and supervision at the Qatar Financial Centre Regulatory Authority (QFCRA), Prue Morris and Henderson Adams had the crucial task of formulating new rules within which captives have to operate, while overseeing their operations to ensure adherence to these regulations. In the event of regulatory breaches, the QFCRA has the necessary powers to take appropriate enforcement actions. Given the Qatar Financial Centre Authoritys (QFCA) focus on captive insurance as one of its three hub development strategies the others being reinsurance and asset management the regulators role is particularly key in ensuring the fine balance between providing the regulatory flexibility to attract potential captives to the QFC and maintaining a regulatory and supervisory robustness that provides a supportive framework for them. The new captive regime commenced on 1 July 2011 and adopts greater flexibility than the QFCs previous regime. To this end, the QFCRA, after two consultation periods throughout 2010 and 2011 that took in the views of the market, created a new rulebook in July 2011 solely for captives, its Captive Insurance Business Rules (CAPI) 2011. Perhaps the most important changes to the rules were the lowering of base capital requirements for Class 2 captives from $1m to $400,000, and the creation for the first time in the region of a new Class 4 captive, enabling the formation of non-conventional captives that do not meet the criteria of other Classes, but which the QFCRA believes can operate effectively as a risk management tool. In another regional first, the updated CAPI permits banking letters of credit (LoCs) to be used as a form of eligible capital for potential QFC captives, subject to certain criteria being met (see Middle East Domiciles section, page 12).
16 | QFCA
recognise the need for a more localised as well as flexible approach. The three existing captive classes that had been hitherto the norm across the three GCC domiciles were seen as too rigid for the needs of certain companies. In a region with a massive amount of capital projects spending, this was particularly the case for companies working on projects in joint ventures with other parties. Previous regulatory regimes made it difficult to permit joint venture partners to form a captive because the rules did not consider them to be sufficiently related or aligned, even though they want to insure a joint risk. The QFCRAs new rules provide more flexibility for members of joint ventures to take shareholdings in a captive and should in theory open up the market to companies involved in the projects sector as well as other firms that want to underwrite more than 20 per cent of third party risks. The Class 4 captive also provides the QFCRA with the flexibility to assess more innovative captive insurance structures on a case-by-case basis by taking into account factors such as the captives business rationale, how it will be used as a risk management tool and the appropriateness of the proposed captive structure. The consultation process carried out in coordination with stakeholders, advisers, individuals and clients, both regionally and internationally, provided very clear proof of the need to have flexibility, says Adams, QFCRAs director of insurance. When we looked at updating the rules for captives, it was apparent that globally there are so many different captive structures that if you tried to define all of them, it would be a very long list. So we decided we would provide the Class 4 captive which would have the potential to capture any type of structure at our discretion, provided it meets certain criteria. At the heart of the changes is an understanding that a more localised approach is needed.
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Rulebook: The regulations will benefit joint ventures
The new rules provide more flexibility for members of joint ventures to take shareholdings
We already had an adequate and robust regulatory regime, but when you looked at other typical captive jurisdictions that are particularly successful [such as Bermuda], it probably wasnt a regime that provided the same level of flexibility, says Morris, who is director of policy at the QFCRA. For this reason, we undertook a review of our captive regime to help make it more attractive and to bring it into line with the QFCAs focus on bringing captives to the QFC and Qatar. Our role is to put appropriate legislation in place to support the strategy of QFCA, while at the same time ensuring that our regulation is aligned with the best international standards that are required by our regulatory objectives. The new CAPI rulebook, particularly the permissibility of the new Class 4 captive, has been widely praised by industry specialists who
photograph: shutterstock
A talking point is the impact the Solvency II Directive will have on EUdomiciled captives
is intended to provide a regime for internationally active insurance groups. So from our point of view like other jurisdictions we are monitoring international standards and want to adhere to the newly approved insurance core principles and standards. We have an existing regime for insurers called the Prudential Insurance Rule Book (PINS), which has capital requirements under it, so we periodically review these aspects. The big unanswered question in the industry is what impact the directive will have on driving currently EU-domiciled captives into other jurisdictions. All three GCC captive domiciles could potentially house them, especially those captives whose parents have business in the region or whose business straddles Asia and Europe. The QFCRA this year reconfirmed with its new CAPI rulebook that it will permit foreign captive insurers to re-domicile to the QFC, provided the captive meets the requirements of QFCs companies regulations and the authorisation criteria and CAPI rules of the regulator. We have heard a lot of talk that captives may wish to re-domicile and what we focused on is providing the regulatory framework to support the QFCA hub strategy and having the framework in place to support whatever decision captives make in terms of re-domiciling, says Morris. We do have re-domiciling legislation and we have the framework to facilitate whatever decisions a company in the EU might take. Were ready for any applications and for any prospective applicants. Ultimately, no one knows what the impact of Solvency II will be, but it is clear that the Gulf domiciles are ready to receive any applications if and when they come. It is also true to say that should a number of EU captives re-domicile to the region, it will be a reflection of the growing maturity of its domiciles and their regulatory regimes, and may in itself be the catalyst for organic regional growth in the captive industry.
QFCA | 17
Jurisdiction: All three GCC domiciles could potentially house captives currently domiciled in the EU When captive regulations were first established in both the DIFC and QFC, they were largely mirrored on those imposed by the UKs Financial Services Authority (FSA) and provided a similar regulatory approach to that used for a direct insurer. This was an understandable stance for domiciles which wanted to establish best-in-class regulatory regimes. But the UK is a wholesale market, and has an economy and a corporate sector many times larger than the UAE or Qatar or even the region as a whole. What works for a developed market might not be successful for a developing one. As a smaller developing market, we are trying to strike a balance, says Morris. We look at a spectrum of jurisdictions and then decide on different areas that are particularly relevant to the QFC jurisdiction. Sometimes this may mean adopting some UK regulations, in others it may be Singapore or Bermuda. Our regulations reflect the best of a lot of other jurisdictions, and are customised in a manner that aligns with the needs of Qatar. Right now, one of the biggest talking points in the captive industry is the potential impact the
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Solvency II Directive will have on EU-domiciled captives. From a regulatory perspective, many captives are keen to understand how non-EU regulators will respond to Solvency II and whether they will follow suit in their own regulatory regimes. As a member of the International Association of Insurance Supervisors (IAIS), an organisation representing insurance regulators and supervisors in more than 190 jurisdictions, the QFCRA works alongside other regulators to ensure best practice in the industry and adherence to the best international standards. Global regulators are reviewing the points raised by Solvency II, but it is likely that any changes to solvency and capital requirements will be made independently of Solvency II and are also likely to be better adapted to local needs. As an active member of the IAIS, we look at broad international standards and we review and benchmark ourselves against adopted core principles, because it is important for us to be aligned with them, says Adams. The other relevant aspect is that the IAIS has a project called ComFrame to create a common framework that

Captive development in the region
There is no denying that captive insurance has yet to really take off in the region. With regulations being in place since 2004, the limited number of captives in the region is far below what was initially hoped. Even today there are few signals that the process of developing captives in the region is accelerating. Many would argue that this is not surprising given the regions developing market status. An assessment of the BRIC (Brazil, Russia, India and China) economies highlights that captives are not prominent in those geographies either. Even in some advanced economies, the captive concept simply has not taken hold; Japanese firms, for example, have very little captive utilisation. On a broad level, there are several reasons for this. In emerging markets, there tends to be a highly competitive local insurance market keeping premiums down and therefore the incentive for companies to explore other risk options open to them. At the same time, local regulations frequently restrict the ceding of risk to captive subsidiaries. In India, for example, companies can only have their risk insured by an Indian company, which in turn can only have the risk reinsured by another Indian firm. A good regional example of this is the UAE, where DIFC-domiciled captives cannot provide insurance services outside the DIFC, other than by way of reinsurance. Another factor is that the commercial environment in emerging markets is generally less litigious than the developed economies, allowing for less risk in certain areas owing to fewer liabilities. Companies in these markets generally have to set aside fewer provisions than their Western counterparts. While the same runs true for the Middle East, there are other region-specific issues that have an impact. Perhaps the biggest impediment to captive growth is simply a lack of awareness of the captive concept or the benefits that it can provide companies. Due to this lack of education and the absence of a critical mass of companies in the region employing captives, there is a lack of general exposure of the captive concept. There is little understanding in the region of what captives are or the benefits they can bring, says George Belcher, an insurance specialist at international law firm Dewey & LeBoeuf.
18 | QFCA
ily have the same driver here to consider captive insurance. The lack of corporate taxation in the region is a key factor. One of the key drivers for the take up of captives in other jurisdictions is the tax benefits captives can provide. However, with low to no tax in the Middle East, this is simply not much of a factor for companies to consider. Nonetheless, captive managers believe captives can provide tax benefits to companies, particularly those with international operations. Tax is definitely a consideration in other parts of the world because you can actually structure your captive to the benefit of the group, says Marshs Vellekoop. Here you dont have tax, but you can still make the captive work, particularly if your assets are here. For example, some GCC-based groups own assets all round the world. Such groups can insure those assets, and because the premium is paid in the overseas jurisdiction, it is tax deductable as a cost for that operating entity. If it comes here and the captive makes a profit for the group, it is tax free. So there can definitely be a tax benefit from captive formation. The prevalence of absorbing risk in-house through companies own insurance subsidiaries is another factor. Family-owned businesses, in particular, over the years expanded into a number of different industries, and as they have grown they have branched into insurance. Today, there are more than 150 insurance and reinsurance firms operating in the GCC. Clearly for many of these groups, there is little incentive to form captive subsidiaries as they are already effectively employing them. A lot of the large family businesses in the region already own insurance companies, says Hodgins. While these are not necessarily captive insurance companies, they do recognise and cover the risks borne within their group companies. Already having their own insurance arms should not be considered an impediment. They can use a captive to re-insure their group company or the other way around. What the captive allows you to do is insure or re-insure a risk or risks that are difficult to buy. A captive is a good way to manage that exposure. It can be argued that the presence of many inhouse insurers may act as an artificial impediment to the growth of the captive industry because these conventional insurers see the development of captives as a threat to their business. While this may not be such an
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Risk: Emerging markets are generally less litigious
The tendency historically has been to cede risk out to the Western insurance markets
The insurance industry in the region is still relatively young. The tendency historically has been to cede risk out to the Western insurance markets. This is certainly quick and easy, but it is often not the most costeffective approach. Insurance is an area that has developed and will continue to develop as the regional economy matures. I predict that we will see increasing retention of risk in the region across the board, not only by regional insurers/reinsurers, but also by regional businesses (or groups of businesses). The latter can manage this retained risk by establishing a captive, which is effectively an in-house insurer. Clyde & Cos Hodgins agrees: A lack of awareness of insurance and risks that are borne by the business is the main challenge, he says. But this is changing as we see insurance penetration growing in the GCC. I think also that one of the key factors elsewhere is not present in this region; that is that group companies here can be very tax efficient, and given the tax regime in the region, the large regional companies dont necessar-
There are a number of different reasons to explain the slow take-up of captive insurance
It has been claimed that one of the reasons the insurance industry is still relatively immature in the region is religious or cultural. Part of this is down to Islamic restrictions on certain forms of insurance due to the prohibition on gharar, loosely translated as making hazardous or inherently risky transactions. Because insurance is, by definition, mitigating an uncertain risk, some claim there has been an historical impediment for it to spread in the region. But this is dismissed by the experts who argue that there is no evidence that companies have been reluctant to insure their risks and that, in any case, sharia-compliant insurance solutions exist if firms are concerned. Most of the government entities dont use takaful insurance; they just want to have the best terms and conditions in order to protect their assets so, no, I dont think sharia compliance is an issue, says Marshs Vellekoop. Most takaful companies seem to focus on family insurance products and less on commercial insurance products purchased by large corporations. As the market currently stands, takaful may be used to insure a small-sized business, but it is very difficult for large corporations because they may not have the capacity or wording to fulfil their requirements. Most large corporations seem to prefer the traditional way of insurance. In short, there are a number of different reasons to explain the slow take-up of captive insurance in the region. But none of them in themselves are inherent impediments to the development of the sector. The increasing number of domiciles and greater flexibility in regulations combined with the growing number of captives and a better awareness of the captive insurance concept should ensure the sectors growth over the coming decade.
QFCA | 19
Middle East: The fact that natural disasters are rare in the region has contributed to relatively low premiums important factor in the UAE, where captives cannot insure risk outside the DIFC domicile, it may be a factor in Qatar and Bahrain where there are no such limitations. This is an argument that does not carry a lot of weight among the experts. Yes, a lot of them [local insurers] might see a captive as a competitor, but that is not necessarily a good understanding, says Clyde & Cos Hodgins. It does not necessarily follow that just because it is a captive that the local players are not going to involve themselves. It depends on the nature of the risks. If you look at local insurance companies, then they tend to heavily re-insure themselves. So actually what they will be doing for captive is not much different. Lots of insurance programmes are placed with reinsurance companies first and then find a local company which is what a captive will be doing. The region is also marked by a low catastrophe risk. Compared with other parts of the world,
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the region is more geological and meteorologically stable. Cyclone Gonu aside, which caused severe damage to Oman in 2007, natural disasters are very rare in the region. This has been an important contribution to the relatively low premiums that the region enjoys compared with the rest of the world. When premiums are low, there is less incentive for captives to be developed, although given the cyclical nature of the insurance sector, this will not always be the case. The region, as elsewhere, is experiencing a soft market, says Dewey & LeBoeufs Belcher. The savings made upon establishing a captive on premium that would otherwise be payable to a third-party insurer are not as pronounced as in a hard market where premiums are high. However, this is a temporary phenomenon rather than a long-term obstacle to the development of the sector.
The case for captives in the GCC

The case for captives in the GCC
While captive insurance has been slow to take off, conversely this also means there is plenty of scope for it to grow. This particularly rings true, given the relative immaturity of the insurance sector as a whole in the region, compared with its relatively high gross domestic product (GDP) growth and high GDP per capita rates. The Middle East remains relatively underinsured. The total spent on insurance in the GCC is about 1.2 per cent of total GDP, far lower than the 7-8 per cent equivalent figure seen in Europe or the US. Life insurance accounts for just 12-15 per cent of insurance spend, compared with an average of 58 per cent elsewhere. As a recent World Bank report on the insurance sector states: The Mena insurance market seems excessively fragmented in some countries and this may have also hindered the sectors development. There seem to be too many companies sharing very small markets. As a result, insurance companies seem unable to generate scale, retain a sufficient volume of premiums, build meaningful risk pools, underwriting capacity and innovate. Many insurance companies seem to act simply as brokers or front offices, reinsuring most of the business. The volume and levels of human capital also remains weak in most countries, hindering the sectors development. The high level of fragmentation and the relatively low penetration rates tend to suggest that a certain number of companies are retaining an undetermined amount of uninsured risk on their balance sheet. In most cases, this is most likely not deliberate, but rather due to a lack of awareness of this trapped potential value and the various options and mechanisms that this value can be utilised. However, there is mounting evidence that this is changing as companies come to terms with
20 | QFCA
Insurance premiums and assets (% of GDP), 2009

Country Algeria Bahrain Egypt Jordan Kuwait Lebanon Libya Morocco Oman Qatar Saudi Arabia Syria Tunisia UAE Yemen Mena GCC Non-GCC Oil Non-oil Non-life premium
0.60 1.43 0.42 1.53 0.34 2.18 0.48 1.54 0.97 0.67 0.46 0.92 1.38 1.34 0.24 0.97 0.87 1.03 0.80 1.22
Life premium
0.05 0.70 0.37 0.21 0.09 0.98 0.01 0.89 0.20 0.01 0.07 0.01 0.25 0.28 0.02 0.28 0.23 0.31 0.16 0.45
Assets
0.8 12.1 3.9 4.8 1.8 7.2 19.0 2.4 2.7 0.0 0.6 3.1 5.3 4.4 6.1 3.8 7.1
Mena=Middle East and North Africa. Source: World Bank
Average penetration rates and assets (% of GDP), Mena and other regions
Mena East Asia & Pacific
0.8 1.6 14.8
New EU-10 countries

1.7 1.1 5.2
Other Europe & Central Asia

0.9 0.1 2.7
High income OECD

2.3 4.0 45.0
Latin America
1.3 0.7 4.9
South Asia
0.5 1.2 6.4
Average nonlife premium Average life premium Average assets
0.97 0.28 4.9
Mena=Middle East and North Africa; OECD=Organisation for Economic Co-operation & Development. Source: World Bank www.meedinsight.com
Indicators of industry structure

Number of insurers % of non-life market held by the top three insurers
62 43 69 25 46 31 80 47 57 95 43 53 49 23 67
Country Algeria Bahrain Egypt Jordan Kuwait Lebanon Libya Morocco Oman Qatar Saudi Arabia Syria Tunisia UAE Yemen Mena average OECD average
Total
15 36 28 28 29 54 9 18 23 9 26 13 17 57 12
Non-life
na 29 15 10 14 18 na 8 12 6 NA 9 3 NA 2
Life
1 3 10 1 2 5 na 1 2 na NA 9 2 NA na
Composite
14 4 3 17 13 31 9 9 9 3 NA 13 12 NA 10
Share of state-controlled companies

72 0 61 0 0 0 44 0 0 0 22 47 20 0 14
The Mena insurance market seems excessively fragmented in some countries
this potential value and premium and penetration rates grow. Premiums have been rising significantly over the past half decade in the region, albeit from a low base, far outpacing premium growth in the world as a whole. For instance, between 2005 and 2009, the compound average growth rate (CAGR) for premiums in the GCC rose by just over 20 per cent, compared with a global average of 4.3 per cent in the same period. This includes a 30 per cent CAGR for premiums in Saudi Arabia and 26.4 per cent and 25 per cent in the UAE and Qatar respectively (see table on lower left).
25 179
11 40
4 106
11 33
52 na
na na
Mena=Middle East and North Africa; na=Not available; NA=Not applicable; OECD=Organisation for Economic Co-operation & Development. Source: World Bank
Comparison of CAGR of total premiums, 2005-09 (%)
30 25 20 15 10 5 0
N
30
25
20
15
10
h or t
Am
eri
ca
Eu
e rop
Jap
an
Ch
ina
ia Ind
E UA
Ba
hr a
in
Om
an
Qa
tar
Ku
it wa u Sa
di
Ara
bia
CAGR=Compound average growth rate. Sources: Swiss Re; Central Bank of Bahrain; BMI www.meedinsight.com QFCA | 21

GCC insurance premiums by type, 2005-12 ($bn)
25 20 15 10 5 0
25
20
15
Growth in the insurance sector is a function of economic and population growth
10
20
05
20
06
20
07
20
08
20
09
10 20
f 11 20
f 12 20
Life
Non-Life
Historical trends elsewhere highlight that captive insurance grows in parallel with the development of the insurance market as a whole. As the Middle East insurance sector matures and penetration rates increase, so too is the expectation that interest in captives will gather pace. Growth in the insurance sector as a whole is a function of economic and population growth. With a young population, high oil prices and booming economies, the GCC is expected to continue its run of high population and economic growth over the coming half decade. As the population and economies grow, so will insurance premiums.
f=Forecast. Sources: Swiss Re; Central Bank of Bahrain; BMI; Alpen Capital
Five-year CAGR forecast for GCC population and GDP
0.15 0.12 0.09 0.06 0.03 0.00
(%)
15
12
Ba
hra
in
Ku
it wa
an Om
ta Qa
r S d au iA
rab
ia
E UA
Population
GDP
CAGR=Compound average growth rate; GDP=Gross domestic product. Sources: IMF; World Bank; Alpen Capital
22 | QFCA
www.meedinsight.com
GCC premium growth forecast, 2010-15
40000 30000 20000 10000 0
Insurance premiums ($m)

40,000
30,000
Total GCC Premium growth (%) premiums will rise 0.250 to close to $37bn in 2015 from $18.5bn 0.225 in 2011
25 22.5 20
20,000
0.200
Dubai-based investment bank Alpen Capital 0.175 forecasts that total GCC premiums will rise to
10,000
17.5
10 20
11 20
12 20
13 20
14 20
15 20
15
0.150
close to $37bn in 2015 from $18bn in 2011, a 20 per cent CAGR over a five-year period, with non-life insurance comprising 86 per cent of the premium total. Insurance penetration and density levels are projected to increase accordingly, with nonlife penetration anticipated to grow to 1.8 per cent in 2015 from 1.12 per cent in 2011 and non-life density rising to $690 from $378 over the same period.
Life premium
Non-life premium
Total premium growth
Source: Alpen Capital
GCC life and non-life penetration rates forecast, 2011-15
0.020
2.0
Penetration rate (%)
0.015
1.5
0.010
1.0
0.005
0.5
0.000
0
11 20
Life
12 20
Non-life
13 20
14 20
15 20
www.meedinsight.com
QFCA | 23

On a country-by-country basis, total premiums are expected to grow substantially, more than doubling in Qatar and the UAE and growing between 40-50 per cent in the other GCC states between 2011 and 2015. Qatar is projected to experience the highest growth with a CAGR of 30 per cent over the same period, spurred primarily by a substantial increase in infrastructure spending as a result of the 2022 World Cup and considerable GDP growth. This overall growth in the GCC insurance market and total premiums should result in a natural evolution of the sector as it becomes more sophisticated. As the market grows and matures, there should be an equivalent and natural momentum toward the development of captive insurance.
GCC life and non-life density forecast, 2011-15
Other factors
There are several other factors pointing to the growth of captive insurance in the region. Over the past decade, as governments have modernised their economies, many previously government-owned organisations have been privatised or spun off into their own entities. This has been a practice particularly prevalent in the UAE, where dozens of government-related entities were established to engage in specific activities and industries.
800 700 600 500 400 300 200 100 0
($)
800
700
600
500
400
300
200
100
11 20
Life
12 20
Non-life
13 20
14 20
15 20
GCC insurance premiums forecast by country ($m)

20,000
20000 15000 10000 5000 0
(%)
35
35 30 25 20 15
Where previously such bodies enjoyed catchall government insurance, their transformation into companies has meant they have had to seek separate insurance policies for themselves and for their assets. The Dubai Holding captive was an attempt to meet the insurance needs of many of its new subsidiaries formed in the wake of the emirates real-estate boom. The regions captive growth potential has been equally assisted by the development of a more robust and mature regulatory regime in the relevant domiciles. Prior to 2004, it was simply not possible to establish a captive due to an absence of appropriate regulations.
15,000
30
10,000
25
5,000
20
Ba
hra
in
Ku
it wa
Om
an
Qa
tar u Sa
2015
A di
rab
ia
E UA
15
2011
2013
CAGR
As the regulations and domicile regimes in the region have matured, so too have they become more on a par with international standards. The QFCRAs recent rule changes, which include the creation of a single rulebook for captives enabling Class 4 captives and extension of LoCs as collateral, is a good example of the continual evolution of a regulatory regime as it seeks to meet the needs of the market while maintaining adequate supervision and regulations.
24 | QFCA
CAGR=Compound average growth rate. Sources: Alpen Capital; MEED Insight
With the establishment of captive regulations, the major captive insurance managers have followed. The likes of Marsh, Kane and Ensurion are all active in the regional market and play important roles in promoting and encouraging the captive insurance concept to companies.
At the same time, the regional economic boom and the expansion of companies in the region has led them to become more aware of risk management strategies in general. As companies have grown, so too has a better understanding of the different risk solutions available in the market and the need to control rising premiums.
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Compared with many developed economies, mandatory insurance laws remain limited in the Middle East. Car insurance is the only insurance line obligatory in every country in the region, while mandatory coverage of other lines varies from country to country. As the table on page 26 demonstrates, the North African states along with Syria have the most stringent regulations, while in other countries, mandatory insurance is limited to only a few specific instances. Economic development and an evolution in business practices inevitably result in an extension of insurance rules to new lines. For example, the rising cost for the government of providing free or subsidised medical care in the UAE resulted in regulations passed in 2010, which compelled all companies to provide medical insurance to their foreign employees. Frequently, insurance provision falls under the aegis of ageing legislation. Increasingly, countries are introducing updated laws that extend mandatory insurance to new lines. Oman updated its 1975 insurance law in 2006. It was followed a year later by the UAE, which updated its original 1984 insurance legislation. Insurance legislation in other GCC states are also due to change. Kuwaits insurance law dates back to 1961, while Bahrains law was promulgated in 1987. Saudi Arabias legal system is based on sharia law and has no formal insurance regulations, although the authorities have been planning to introduce formal legislation for some time. As governments update their insurance legislations, the number of mandatory insurance lines is likely to increase. Typically, the first compulsory legislation to be enforced is other liability coverage where the public is exposed to company risks. These tend to include insurance lines such as contractors all risks (CAR), public transport risks and professional liabilities. The development of legislation and the GCC economy as a whole are likely to result in the imposition of additional mandatory insurance lines, which in turn are likely to add a greater burden to companies insurance requirements and therefore premiums. As has been seen in other parts of the world, this maturing of legislation and the insurance sector in general is a catalyst for the development of captive insurance.
www.meedinsight.com
Mandatory: Car insurance is the only obligatory line of insurance in Middle East states
Oman updated its 1975 insurance law in 2006. It was followed a year later by the UAE
QFCA | 25

Mandatory insurance lines in the Middle East*
Algeria Bahrain egypt Jordan Kuwait Lebanon Libya Morocco Oman Qatar saudi Arabia x x syria tunisia uAe x
Expatriate medical expenses Fire and explosion Property Registered entities Marine cargo imports Vessel and aircraft hull Public liability Hotels and restaurants Contractors all risk (CAR) Registered entities Petrol stations Third-party liability Motor liability Public sector contractors Lifting devices Excursion/ campsites Hunters Goods and passenger carriers Workmans compensation (WCA) Light aircraft testing Pleasure craft Professional liability Construction professionals Engineers Property decennial Medical Accountants Lawyers Insurance consultants Port operators
*Property owners with mortgages in freehold areas must have life insurance. Source: World Bank
x x x x
x x
x x x x
x x x x x x
x x x
x x x x x
x x x x x x
x x
x x
26 | QFCA
www.meedinsight.com
Infrastructure development
The other key area expected to be a potential major driver of captive take-up is the development of the Middle Easts projects market.
Value of GCC projects planned or under way ($m)
800000 Since the oil price began to rise in 2002-03, the 700000 region has been rich in cash, much of which has been invested in the regional projects mar- 600000 ket. The result has been a massive projects boom that has seen hundreds of billions of dol-500000 lars invested in new projects. Prior to 2008, the focus was on the Dubai real-estate sector, but 400000 since its crash the emphasis has been on social 300000 infrastructure and utility development in Saudi Arabia and Qatar. 200000 Today, the GCC projects market alone is worth just under $1.8 trillion and growing. The boom 100000 has resulted in the construction of hundreds of 0 new projects and presented dozens of contract
opportunities for contractors. There is little doubt that this projects market growth has had a beneficial impact on the development of the insurance industry. An analysis of the regions captives set up so far in the region underlines the link with the projects market even though they operate in different sectors. Saudi Aramco, Kuwait Petroleum International, Qatar Petroleum and Saudi Arabias Sabic are all project clients who have established captives primarily to ensure their facilities. The UAEs Tabreed and Saudi Arabias Acwa Power are firms set up to build and operate district cooling and power plants respectively. Saudi Readymix of course has benefited from the kingdoms construction boom. As the value of the assets of these companies has grown, they have looked to mitigate their risk in a more innovative manner by establishing captive subsidiaries. With the projects market continuing to grow, there is the rightful expectation that other project companies will follow suit. Firms working in the projects field are particularly seen as prime candidates for captive formation. In many cases, the likes of contractors and project sponsors in the region are paying premiums based on global risk profiles rather than those specific to the Middle East. Given the regions lower catastrophe, litigation risk profile and generally lower constructionrelated risks, in many cases companies are paying excessive premiums. Data from regional projects tracker MEED Projects highlights that there are more than
www.meedinsight.com
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
Ba
hra
in
Ku
it wa
Om
an
Qa
tar u Sa di
Ara
bia
E UA
Source: MEED Projects
GCC projects planned or under way by sector

Water and waste Metal Gas processing Petrochemicals Refining Construction Oil and gas production Alternative energies Pipeline
Values
51 17 7 7 6 6 1 1 1 1 1
Power
%
Infrastructure
Source: MEED Projects
800 individual main contractors working on projects worth $50m or more in the GCC alone. Of these, just under 600 are regional companies. Likewise, there are more than 800 project sponsors and clients with projects planned or under development worth more than $50m. In total, there are more than 2,838 projects either under construction or planned in the region. The average budget value for each
scheme is $501m. For contractors, clients, subcontractors, suppliers and vendors, there are potentially thousands of companies active in the region with contractual commitments or liabilities worth hundreds of millions of dollars. If each firm has annual insurance premiums in excess of $3m, then there is a huge potential for captive insurance among companies engaged in the regions massive projects drive.
QFCA | 27

GCC projects market key figures
number of projects planned or under construction
2,838
number of clients and project sponsors

814
Average budget value of each project

$501m
number of regional contractors working on construction projects

599
Average contract value of projects under construction

$319m
solvency ii
Although the focus has been on the growth of captive insurance subsidiaries among regional companies, the impending impact of the EUs Solvency II directive is making the GCC domiciles an increasingly attractive proposition for European captives. Adopted by the European Parliament in 2009 after the global financial crisis, Solvency II is aimed at strengthening the solvency and capital requirements among insurance firms in the EU. The directive, which is due to come into force in early 2013, is based on three pillars covering quantitative and qualitative requirements and the disclosure of information. In essence, the quantitative aspect of Solvency II requires insurers and reinsurers to raise their minimum capital in order to reduce insolvency risk. In addition, the qualitative aspect requires insurers to incorporate systems of governance to ensure an adequate management of risk, assess capital needs and ensure that the capital requirement is maintained. Finally, Solvency II will require that insurers regularly publish two key documents, called the Solvency & Financial Condition Report (SFCR) and Report to Supervisors (RTS), as a means of improving public scrutiny of how the companies are managed. As a result of the new requirements, many captives currently domiciled in the EU could be negatively impacted by the new legislation. Captives based in Scandinavia, Malta, Luxembourg and Ireland face having to increase their statutory capital requirements by between 200-500 per cent. Across all impacted domiciles, the average statutory increase required will be 370 per cent, according to Marsh. There will be many captives questioning the appropriateness and their own financial ability of increasing their minimum capital requirements by a substantial amount. Moreover, Solvency II offers two major potential impacts for captives. The first pertains to counter28 | QFCA
Potential average capital increase for EU captives due to Solvency II (%)
600 500 400 300 200 100 0
600
500
400
300
200
100
Ire
lan
Ma
lta L em ux
bo
urg S
Source: Marsh
in nd ca
ia av
The Solvency II directive is making GCC domiciles an attractive location for EU captives
party risk. For tax purposes, many Europeandomiciled captives reinsure risk with their parents main captive located in offshore domiciles. The new directive will require the European captives to effectively take no credit for the reinsurance. In the words of Marsh, under Solvency II the captive: should be capitalised as if the purchased reinsurance assets did not exist. The second issue is catastrophe risk. Much of the capital requirement increase is based on captives being able to cover their parents catas-
trophe risk. A 100 per cent loss on a 1-in-200years event is not considered a likely scenario by the industry and is therefore unwarranted. Its too early to say definitively what the outcome of the Solvency II process will be, says QFCAs Randeva. But according to the data weve seen, 80 per cent of European captives would not be classified as captives under the new directive. The regulations should be proportional to the risk and the quantitative capital requirements will definitely have an impact. There may be a case for a lot of structures in Europe to rethink their structures, their domiciles or both. Most Middle East states broadly follow the original EU Solvency I rules. For the GCCs captive domiciles, the solvency regimes are broadly based on having a minimum capital equal to or greater than their base capital requirements. Regardless of the exact requirements, all three GCC domiciles offer more liberal regulatory terms than those implied by Solvency II. Given the presence of double taxation agreements and increasingly mature and sophistiwww.meedinsight.com
cated regulatory regimes, it is not surprising that some currently EU-domiciled captives may be looking to relocate to jurisdictions that will not fall under the new regulations. While the majority will probably look first at geographically closer non-EU European domiciles such as the Isle of Man and Guernsey, there is the possibility that some may consider relocating to the GCC domiciles. This may be particularly attractive for parent companies with commercial interests in the Middle East or Asia. Geographic location is an important factor in selecting a captive domicile and for those companies, having a captive centrally located between key business locations is an enticing prospect. We have had some enquiries from European captive owners following the introduction of the new Solvency II terms, says Marshs Vellekoop. The treatment of captives under the directive is still uncertain and some European captive owners or prospective captive owners dont like the new capital requirements. Some of them will consider Dubai and other GCC domiciles, although they can of course consider European jurisdictions that fall outside the EU. This is a view shared by Kanes Brook. The regulatory uncertainty that exists in other countries, particularly with the forthcoming implementation of Solvency II, is also serving to promote the advantages of domiciling a captive in the Middle East, he says. The directive is already having an impact on captive domiciles both inside and outside the EU, and parent companies are assessing the impact of the legislation on their captive strategy. It is expected that capital requirements for EUdomiciled captives will rise under the new solvency regime, while other captive domiciles outside the EU consider equal measures. At a time of regulatory upheaval, domiciles such as Dubai and Qatar offer stability and a solid captive framework. Such domiciles will see an increase in interest as captive owners seek greater predictability over the amount of capital required and a reduction in operational costs. There are more than 550 captives in the EU, the majority of them in Ireland and Luxembourg. If even a small percentage changed domicile, many could relocate to the GCC. Negotiations over Solvency II are ongoing and the rule changes for captives may be relaxed. But the directive could have an impact on industry growth in the region over the coming decade.
www.meedinsight.com
photograph: DrEaMStIME
Necessity: Solvency II focuses on ensuring that a captive can cover its parents catastrophe risk
QFCA | 29

Mutual associations
While the focus on captives has been on captive units set up by parent companies, the captive concept allows for a wider captive ownership. One group that could benefit from the establishment of a captive is mutual associations. In other domiciles, it is not uncommon for groups such as professional pilots, lawyers or doctors associations to form a mutual captive to write policies covering unique risks specific to their profession. For example, a captive can be set up by a pilots association to provide cover in the eventuality that a pilot loses his licence and therefore livelihood. You can have associations of surgeons and physicians, for instance, says Vellekoop. This industry has a significant exposure to medical malpractice. Often the insurance they can obtain wouldnt cover the risks that they want covered or sometimes the price is not right. So what such an association can do is set up a mutual captive to ensure that the policy is tailored to their requirements. A PCC is an ideal structure for associations because it does not involve them having to go through the process of incorporating their own captive, something which they may be illequipped to do. Since the running of the captive is handled by the captive insurance manager and a single board at the core level, the amount of time and effort required to oversee the cells performance is far lower than a conventional captive. The recently incorporated Global Star PCC, the case study for which can be found later in this report, is looking closely at attracting professional associations to form cell captives. Companies within a certain industry themselves can form associations that set up a cell captive to deal with their specific insurance interests. Perhaps the best instance of this is the Bermuda-based OIL Insurance, a captive comprising 50 member oil companies insuring billions of dollars of their global energy assets. Although industry-related associations in the region such as the Gulf Petrochemicals & Chemicals Association (GPCA) and the Middle East Business Aviation Association (MEBAA) are becoming more commonplace, the feeling is that there is still some way to go before these types of industry bodies are ready to jointly form a captive dedicated to insuring their risk. If you look elsewhere in the world, [industry associations] forming a captive is the trend, says Clyde & Cos Hodgins. But its not necessarily happening here, which I would put down to the level of competition within the marketplace. At the moment, the chances of two industry-related companies wanting to form an active captive are quite slim. History shows that a seismic shift is often required for this to change. It was the 1980s when a number of natural disasters drove oil and construction companies to form association captives, such as OIL. Because of the capital-intensive nature of these types of large construction and energy projects that these firms were involved in, there werent always the competitive insurance terms available in the commercial market, says Vellekoop. Industries just werent able to find the right price, the right capacity or the right terms and conditions and so captives became the best option.
Wrap-around insurance coverage model

parent compensates subsidiary for loss parent
s
Overseas subsidiaries
li po cie
diC/diL coverage
in
ra su
nc
CAptive Local insurer traditional model Under a traditional arrangement, the captive provides insurance cover to its parent and each of its overseas subsidiaries, either directly or through local insurers if required by the associated jurisdiction. DIC/DIL coverage is offered as part of a master policy with the parent to ensure consistency across the different policies.
DIC/DIL=Differences in conditions/differences in limits. Source: MEED Insight
regulator insists on premium taxes or declares policy illegal
30 | QFCA
www.meedinsight.com
reguLAtOrs
premium
The growth in Takaful insurance solutions has been major in the Muslim insurance world
While the same circumstances do not yet apply to the region, there have been a number of significant developments, such as the Dubai realestate crisis and the cancellation of many projects. These could trigger industry-related firms to band together to create captives to cover specific types of shared risk.
Financial interest cover model
parent can make tax-free payment to subsidiary or retain claims payout Financial interest cover CAptive premiums parent
Financial interest cover model Under the financial interest cover model, only the parent is insured by the captive, with claims made if the overseas subsidiary makes a financial loss. The parent can choose what it wishes to do with the payout, but since the insurance contract was made only with the parent, there are fewer tax and insurance regulation implications.
Financial interest cover

A type of coverage gaining momentum is financial interest cover. For multinational corporations with subsidiary firms in many countries, this type of insurance is gaining in popularity and insurance experts say that it is also an area in which regional and international groups, looking to set up captives in the GCC domiciles, are increasingly expressing interest. Traditionally, multinational companies would insure their global subsidiaries on a local basis, with policies governed by local legislation. While this provides adequate insurance coverage for each subsidiary, it is not always consistent. To get around this, the group companies purchase wrap-around coverage, which essentially supplements the local policies in each jurisdiction by covering the differences in conditions/differences in limits (DIC/DIL) between them. But this approach is increasingly falling foul of regulators in each country, especially in jurisdictions where only local insurers and reinsurers can provide coverage, such as India. In the event of a claim being paid out to the local subsidiary under the DIC/DIL coverage, the regulators can claim that this is insurance being provided by an unlicensed overseas insurer and/ or that local premium taxes should apply to the claim. In effect, the DIC/DIL coverage is illegal. In cases such as these, one of the best alternative insurance solutions is financial interest
www.meedinsight.com
Crisis: Developments like the Dubai real-estate crash can motivate firms to group together and form captives
QFCA | 31
Financial interest cover could be very attractive for Indian group firms in the Gulf
cover. Here, the parents financial interest in its subsidiaries is covered under its own master policy, with any potential loss by a subsidiary calculated on the basis of the amount it would have received if it had been directly insured by the master policy. Payment from any claim is made directly to the parent company which can choose to do what it wants with the funds, including repatriating them directly to the subsidiary if it can find a tax-efficient and legal means of doing so. Because the financial interest cover is part of the master policy taken out by the parent, there are no compliance issues with local regulators. Its an idea people are increasingly talking about, as it starts to filter through, says Hodgins. If you have a big multinational, the regulations and tax and legal position for each subsidiary can be complicated. Financial interest cover potentially simplifies this to a degree. Financial interest cover may be of particular interest to groups that have local operating subsidiaries in different countries in the region, especially given the limitations on non-domestic insurance underwriting in certain states. As the regions economy expands and companies look to enter new regional markets, the expectation is that this type of insurance solution may actually take off. Another area where financial interest cover could potentially be very attractive is for Indian group companies in the Gulf. Many of these firms have or are expanding operations in the subcontinent, as well as the GCC. In jurisdictions with so many conflicting insurance regulations and taxation regimes, financial interest cover is a practical solution.
www.meedinsight.com
Insurance: Massive firms like Boeing have found it necessary to create a captive subsidiary
GCC gross Takaful contributions
5000 4000 3000 2000 1000 0
($m)
5,000
4,000
3,000
2,000
1,000
20
05
20
UaE
06
20
Kuwait
07
20
Bahrain
08
20
09
Saudi arabia
Qatar
e=Estimate. Source: Ernst & Young
32 | QFCA
Takaful growth
The growth in Takaful or sharia-compliant insurance solutions has been a major facet of the insurance industry in the Muslim world over the past decade. Due to the restrictions on conventional insurance under Islam, the presence of Takaful solutions has been a major growth factor for the development of the insurance industry in the GCC. According to data collected by Ernst & Young, gross Takaful contributions in the GCC grew by a CAGR of 45 per cent between 2005 and 2008, and by 31 per cent in 2009 alone. Saudi Arabia is by far the dominant market in the Takaful space in the region. Its high growth over recent years has been fuelled primarily by the introduction of compulsory medical insurance. This trend is expected to continue into 2011, with the GCC forecast to grow by 31 per cent, according to Ernst & Young, with gross Takaful contributions from the GCC rising to $8.3bn.Having proved itself effective, the continuing development and increasing popularity of sharia-compliant insurance solutions could act as a catalyst for the establishment of the regions first self-Takaful. Captives are naturally compatible with the Takaful solution, says Hodgins. By its nature, Takaful, rather than being a risk transfer from a company to an insurer, is more of the company collecting together with other like-minded entities and pooling their risks. Those risks are then managed by a Takaful operator, which sounds just like a captive to me. To make a captive sharia-compliant is not terribly difficult. Yes, you will need a sharia board and it will involve some costs, but it would really depend upon the size of the business being put through the captive. How much time and resources are required depends on the availability of sharia professionals. Sharia scholars tend to charge hourly rates, so it doesnt need to be prohibitively expensive. I also think that most companies that would want to have a sharia-compliant captive would already have a sharia board, so again compliance may not be difficult. The only question there would be is if there are any conflicts of interest among the sharia board members. Such issues can readily be resolved with careful structuring.
www.meedinsight.com
Takaful contributions by business (%)
1.0 0.8 0.6 0.4 0.2 0.0
100
80
60
40
20
20
Motor
07
20
property and accident
08
20
09
Marine and aviation
Family and medical
e=Estimate. Source: Ernst & Young
GCC gross Takaful contributions forecast
10000
10,000
($m)
8000
8,000
6000
6,000
4000
4,000
2000
2,000
0
0
20
09
e 10 20
f 11 20
e=Estimate; f=Forecast. Source: Ernst & Young
QFCA | 33
Quantifying the GCCs captive market potential

It is impossible to precisely quantify the potential for captive insurance take-up in the region. Globally, captives tend to be set up by the largest companies, which have the most potential savings and efficiencies to be made from them. It is no surprise that the first two captives in the Gulf were Saudi Aramco, probably the worlds most valuable firm, and Sabic, the largest listed company in the region. Indeed, the regions captive insurance specialists confirm that of all the companies in the region likely to establish captives, the largest firms are expected to lead the way. Based on this assumption, it is possible to identify a general pool of firms that could potentially benefit from the establishment of a captive subsidiary based on their size and likely insurance and premium requirements. An obvious means of doing this is to measure companies by revenue using publicly available information on listed companies and from private companies which choose to publicise their earnings. In terms of companies with annual revenues of more than $10bn, there are just three listed companies: Sabic, Saudi Telecom Company and Petro-Rabigh, the petrochemicals producer. To that list, it is safe to add the regions national companies, among them Aramco, Kuwait Petroleum Corporation and its subsidiaries, QP, Adnoc and its subsidiaries, and Petroleum Development Oman. The list of companies with revenues in excess of $5bn is slightly larger with the addition of telecoms firms Etisalat and Qatar Telecom, financial institutions Al-Rajhi Bank and Kuwait Finance House, and half a dozen other listed firms. When the threshold is lowered to companies with more than $1bn in annual turnover, there is a big leap to more than 80 companies. This increases to more than 140 companies when the revenue figure is reduced to $500m.
34 | QFCA
Number of GCC-based companies based on annual revenues*
150 120 90 60 30 0
150
120
90
60
30
$ >
,0 10
00
m > $5
,00
0m >
,00 $1
0m
$ >
50
0m
*Based on listed companies and firms that have released such information only. Sources: MEED Insight; Zawya
GCC firms with annual revenues exceeding $500m by sector*

Consumer goods Leisure and tourism Power and water Food and beverages Construction Real estate Financial services Retail Mining and metals Services
Values
51 19 13 9 9 6 5 4 4 3 2 2 1 1
Industry
Transport
%
Oil and gas
Telecommunications
*Based on listed companies and firms that have released such information only. Sources: MEED Insight; Zawya www.meed.com
Number of GCC companies based on number of staff employed*
300 250 200 150 100 50 0
300
250
200
150
100
50
Take-up: The regions big corporations will lead the way

> 2 0 5,0 0 0 5,0 >1 0 0 0,0 >1 0 > 0 5,0 0
Breakdown of GCC companies with more than 5,000 employees*

Agriculture Telecommunications Information technology Healthcare Oil and gas Leisure and tourism Consumer goods Financial services Services Conglomerates Mining and metals Power and utilities
Values
121 30 26 Construction 17 14 14 14 10 9 7 7 5 5 4
Whether or not having a captive makes sense depends on the needs of the firm
When companies with more than 5,000 employees are taken into account, the number of companies increases to about 300. Given construction firms labour requirements, it is again not surprising to see that the construction sector comprises nearly half of all companies with more than 5,000 employees. Two other labour-intensive sectors, industry and transport, are a distant second and third, with 10 and 9 per cent respectively. However, while it is possible to quantify the number of large companies in the region likely to have premium levels to make captive insurance an option, this does not tell the whole story. For example, both Tabreed and Saudi Readymix, two of the companies with captives in the region, do not have revenues in excess of $500m or more than 5,000 employees. This again underlines that while company size is an indication, whether or not having a captive makes sense depends on the needs of the company, its risk profile, and the sophistication of its insurance strategy.
QFCA | 35
Retail Food and beverages
%
Transport Industry
Real estate
3 1 1 1
Of these companies, close to 40 per cent are banks or other financial institutions. Oil and gas firms comprise 15 per cent, while telecoms companies form 10 per cent of the total. Another way of assessing the potential market is to measure companies by the number of employees. This provides a greater pool of firms because private companies are more
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comfortable detailing their number of staff than they are with disclosing their financials. In the GCC, there are more than two dozen regional firms with more than 25,000 employees. The bulk of these are contractors such as the Saudi Binladin Group and Arabtec, which is unsurprising given the large number of labourers they require.
Prognosis
T
he captive insurance concept is gradually gaining traction in the region, but all involved admit there is still some way for it to go before becoming widely accepted in the region. When this may happen is unclear, but there is a growing convergence of factors already outlined in this report, which are pointing towards the development of a critical mass in the region. When you look at the GCC, risk management has only recently become a board-level topic of discussion, says QFCs Randeva. There is now a confluence of factors that have come to a head in the last five to six years, which should have some positive impact on the take-up of captives. But what we are not seeing are the right fundamentals in the market just yet to accelerate this process. Pricing is a factor, with many companies saying they would set up a captive when premiums rise. As we have seen, there are reasons to believe that there is a rising trend of premium increases in the region, which will over time compel companies to look more seriously at mitigating their risks cost. The market will also enter an up cycle and that in turn will also have an upward effect on premium levels. Similarly, there is a feeling that Solvency II may drive some EU-domiciled captives into other jurisdictions, with some perhaps looking at re-domiciling to the GCC as a result. However, much will depend on just how much of the Solvency II directive will itself be incorporated by the regions regulators. There are other reasons to be hopeful. The formation of the first open PCC in the region paves the way for new opportunities previously unavailable, while the ongoing awareness and educational work done by the likes of Marsh, Kane and Ensurion will eventually bear fruit. There is already a heightened interest in the captive option with a number of major companies in the region, says Kanes Brook. How36 | QFCA
Domicile: Qatar seeks to create a captive environment with a strong regulatory capability
Pricing is a factor. Many firms say they will set up a captive when premiums rise
Qatar and Dubai seek to create a captive environment with a strong regulatory capability, which is efficient, cost-effective and conducive to growth in this competitive marketplace. This view is echoed by Dewey & LeBoeufs Belcher. Captives can be versatile structures and the emerging regulations are encouraging this, he says. I foresee growth in the use of captives amongst the conglomerates that are common in the region, groups of businesses in the same industry, as well as unrelated users, for example rent-a-captives. A further possibility is whether captives will be developed for use in a sharia-compliant manner. As more companies embrace captives, there is the very real expectation that the region will become as much a captive hub as the other main domicile groupings the world over. What the market needs probably is a critical mass of companies adopting the captive subsidiary. The region is very much one of trends, but trends, initially at least, take some time to pick up pace.
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ever, the financial crisis, while having a much reduced impact in the Middle East in comparison to many Western countries, did see selfinsurance projects stalled. Now that the economic clouds have dispersed to an extent, these projects are coming back onto the table. It is also important to acknowledge that while the region now has domiciles offering captive legislation, this is still a work in progress. While the building blocks are in place, they are still being refined, as jurisdictions such as
Global Star case study

O
ne of the most interesting and innovative developments in the regional captive insurance industry has been the establishment in 2011 of Dubai International Financial Centre-domiciled Global Star PCC, the first open Protected Cell Company (PCC) in the GCC, offering captive insurance cells to any client showing a credible business case. The PCC is the brainchild of Ruan Janse van Rensburg, a Bahrain-based actuary who saw a gap in the market for companies and associations that wanted the benefits of a captive subsidiary, but without necessarily the costs, expertise and administrative time that managing a captive requires. Janse van Rensburg, who is the sole core shareholder in the PCC with a paid-up core share capital of $300,000, worked with Marshs Vellekoop over a period of almost two years on formulating its proposition and feasibility. We saw an opportunity in the market for a PCC like Global Star, says Vellekoop, who acts as the PCCs insurance manager and is one of its directors. There are many smaller organisations that can benefit from a captive solution, but which dont come with the same operating expenses as a normal captive insurance company for example. I like to compare a PCC with an apartment building. The core-shareholder is the landlord; the cell-owners are the tenants; the captive manager [like Marsh] is the property manager. A PCC is a way to gain quick access to a captive insurance solution, without the sometimes time-consuming process involved in setting up a new company. A PCC is a single company whereby the articles of association are altered to create a core and an indefinite number of cells, which are kept separate from each other. Each cell has assets and liabilities attributed to it, and its assets cannot be used to meet the liabilities of any other cell, hence Protected Cell. The company will also have non-cellular (or core) assets, which will be used to meet liabilities that canwww.meed.com
Comparison: Vellekoop likens a PCC to an apartment building with a landlord, tenants and property manager
The core-shareholder has the voting rights and appoints the independent directors
tors of the PCC. The cell-shareholder(s) have the dividend rights in respect of their cell and are therefore entitled to the profits made by the cell. Basically, a protected cell of a PCC can be used as a captive insurance vehicle, with the cellshares held by the respective cell-owner, who participates within the PCC structure, says Vellekoop. A PCC is therefore a platform company enabling clients wishing to utilise a captive insurance vehicle for self-insurance purposes, without incurring the operating expenses of a normal captive insurance company. One way of operating would be for a PCC sponsor, such as Janse van Rensburg, to establish a PCC and to have it authorised by the relevant insurance regulator as an insurer. A cell, operating as a captive insurance vehicle, or special purpose vehicle, could then be offered to qualifying prospective cell-owners that want one for
QFCA | 37
The core-shareholder has the voting rights and therefore appoints the independent direc-
not be attributed to a particular cell. A PCC can create and issue cell-shares in respect of any cell, but the entire company is managed by a single independent board appointed by the core-shareholder.

self-insurance purposes, without the need to set up a new captive insurance company, appoint directors, auditors and other professional service providers. The authorised financial services firm will be the PCC and the creation by the PCC of a new cell does not create, in respect of that cell, a new legal entity. The cells do not have separate legal existence, but are a segmental part of the PCC. Each cell will be able to carry out and effect contracts of insurance, purchase reinsurance, receive insurance premiums and pay claims from its own bank account. So, if you are an organisation whereby the insurance premium spend is significantly higher than the claims incurred over the past few years, you are possibly subsidising your commercial insurer for claims suffered elsewhere in its portfolio, essentially subsidising other policyholders losses, says Janse van Rensburg. If you are not happy with this, you could consider the captive insurance solution. Company insurance or reinsurance solutions are clearly the most obvious purposes for establishing a cell within the PCC, with the assets and liabilities of each cell-owner ringfenced and protected from all other cells. Firms can establish a cell captive within a PCC for a regulatory minimum base capital of $50,000 (although ultimately the regulatory capital requirement will most likely be higher than the minimum capital requirement dependent on the additional application of the solvency and/or risk-based capital requirement proposed by the regulator) and considerably less licensing and administrative costs than a standalone captive. At the same time, because an independent board of directors sits at the core level and manages the cell directly, there is less management time and expertise required to run the cell efficiently. While creating self-insurance programmes may well be the obvious targets for setting up cells, Vellekoop and Janse van Rensburg are also investigating a number of other areas. One of these is association-owned captive cells to be used as a savings and protection vehicle offering any combination of insurance, such as life, disability, medical and unemployment. A cell captive can be utilised by commercial, industrial and not-for-profit organisations and associations. For example: an association of accountants or lawyers can create a cell and pool their professional indemnity exposure; an
38 | QFCA
view, that is not desired. Naturally, the independent PCC board will honour nearly every request from the cell-owner provided it meets all legal and regulatory requirements. In the DIFC, PCCs can only be used for captive insurance solutions and umbrella funds as specified in the regulatory rulebook. A cell can be licensed for the life insurance classes. Janse van Rensburg and Vellekoop are investigating whether Global Star could offer corporate pension solutions as an off-balance alternative to the end-of-service gratuity, thereby safe-guarding these funds for employees. We havent tested these ideas yet, but because we are so young we definitely want to explore the options potentially open to us, says Janse van Rensburg. Global Star is still at a nascent stage, but the omens are already promising, with a number of organisations and associations having already approached Global Star about forming a cell. The flexibility cells offer means that the PCCs promoters have a number of different avenues they can explore, although in the case of captive cells, potential cell owners will still need to have certain annual minimum premium levels to make them cost effective. In addition to the minimum capital requirements, firms should also consider the various management and licensing fees that operating a cell entails. Once the decision is made, it is only a matter of weeks to establish a cell within a PCC, unlike the six to eight months it can take to create the PCC itself or a traditional captive insurance company. This short timeframe is another key attraction of a cell captive. The PCC simply has to provide the regulator with a cell business plan and ensure enough funds are available to meet the regulatory capital requirements. Vellekoop is optimistic about Global Star PCCs potential. The key issue remains the lack of awareness of the captive insurance concept in the region, which both he and Janse van Rensburg are doing their best to overcome. Nobody is expecting quick results, but with the number of permitted cells unlimited and an increasingly receptive market, all the ingredients are there for the PCC to be a success. We have to be optimistic, says Vellekoop. But you have to give us around four years to create awareness and comfort among clients. Awareness of this concept is important of course, but we also want and need to make sure the concept makes sense for our clients. If it doesnt, we are not going to push it for the sake of it.
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Cell captive: An association of surgeons could benefit
Global Star is still at a nascent stage, but the omens are already promising
association of airline pilots can insure themselves against loss of their aviation licence following permanent disability; and an association of surgeons or physicians can insure themselves against their medical malpractice exposure. Ultimately, a captive insurance vehicle is a risk management tool and risk financing mechanism that can provide numerous advantages over a commercial insurance programme, provided the risks are managed properly. However, cell captives can also have their disadvantages as opposed to a normal captive insurance company that their cell-owners need to consider. The primary issue is the perceived lack of control the cell-owner has over its own cell. The core-shareholder has the voting rights and appoints a single independent board of directors and is duty bound to act in the best interest of the PCC in its entirety. The cell-owners cannot appoint directors to the single board of the company. This perceived lack of control by the cell-owners is sometimes seen as a disadvantage for participation in a PCC. Individual cell owners cannot appoint their own directors to the PCC board, otherwise the directors from two competing organisations would be able to look into each others cells, says Vellekoop. From a competitive point of
Mubadala case study

s one of the key planks of the Abu Dhabi economy, the adoption of a captive insurance subsidiary by Mubadala Development Company (MDC) is a significant development in the evolution of the insurance industry in the region. MDC (RE) Insurance, the first captive out of Abu Dhabi, was incorporated in February 2010 at the DIFC with an authorised share capital of $25m and a paid-up share capital of $2m. The catalyst for MDC (RE) Insurances formation was the arrival of Matthew Hurn, executive director of Group Treasury at Mubadala. Hurn had experience of operating a captive insurer effectively in his previous role as group treasurer of the Dixons Group and he saw the opportunity and potential advantages for Mubadala to set up its own captive insurance subsidiary. When Hurn came in, he basically challenged us to look at the feasibility of setting up a captive for Mubadala, says Alan Corney, head of group insurance at the company. So we engaged Marsh to carry out a feasibility study that basically looked over our portfolio, our potential growth and development and see where a captive might fit and what kind of benefits it might bring or not, as the case may be. We then decided to take it to the next step of incorporating the captive and since then have never looked back. Prior to the adoption of the captive, Mubadala and its various divisions tended to arrange their own insurance with no centralised approach. Corney explains that a natural consequence was that Mubadala may not have necessarily been getting the best value out of its premium payments. Similarly, there were varying standards of risk retention and variable qualities of wordings in their insurance policies. For an investment and development company such as Mubadala that wanted to benchmark itself against its international peers, there were clear, potential synergies that could be gained from a captive by consolidating prowww.meed.com
home. Besides this, the ability to conclude participation on competitive terms and prices otherwise declined by the open market that would have pushed the project to increase premium spend was also viewed as a positive factor. Corney adds: We are trying to lead by example, which fits in very nicely with one of Mubadalas key objectives, which is to accelerate the development and diversification of Abu Dhabis economy. From Mubadalas strategic perspective, its giving us the discipline to better identify, understand and manage our risks, says Mahra Rashed al-Suwaidi, treasury manager at Mubadala. At MDC (RE), we never initiate actions that would be to the detriment of the project. The projects interest is primary before the captives monetary benefit. Positioning itself as a pioneer with regards to captives is a critical aspect of MDC (RE) Insurance. In the region as a whole, there is a general lack of understanding behind the mechanics of the insurance industry, with most companies happy to go along with the status quo of using local brokers or insurers to obtain and accept quotes for their insurance needs. Because this approach does not always ideally meet the requirements of regional companies, both from a risk coverage and commercial perspective, Mubadala is keen to act as a catalyst for other firms to follow in its footsteps. Likewise, the company did at one point consider obtaining a conventional insurance licence, but soon realised this was not in the best interests of the local economy. There was a discussion on the merits and demerits of our pursuing an insurance licence as opposed to a captive, but the last thing we wanted to do was to start becoming a direct competitor to the local insurance community, says Corney. For much the same reason, selecting the DIFC as the captive domicile was an obvious choice.
QFCA | 39
Abu Dhabi: The captive is a pioneer in the region grammes, leveraging relationships with insurers and extending potential benefits to the groups different subsidiaries. In many ways, the biggest challenge during the initial process was the internal selling to Mubadalas management of the captive concept and the advantages that it would bring. Because the captive would not be hugely profitable in the short term at least it was necessary to create a convincing argument that the captive could bring other, less tangible, advantages to Mubadala, such as gaining a better understanding of its overall insurance risk profile and creating a more robust internal discipline with regards to the groups insurance strategy. It was ultimately the realisation of key benefits that a captive insurer would bring to Mubadala that led to the establishment of the entity. For example, the project brokers should be able to capitalise on the reduced open market risk share, whereby only a lower percentage would be available for reinsurers, which in turn should stimulate increased competition while helping to drive the most competitive deal

As part of the feasibility process, Mubadala scored nine domiciles rating them against 27 criteria, which extended to include capitalisation, regulatory structure and solvency margins among others. With the DIFCs geographical proximity, it was easier to have a transparent relationship with the authority, which led to the successful completion of MDC (RE)s first risk assessment process within its first year of incorporation without a risk mitigation plan. With the captive now firmly established, the Mubadala insurance team is focused on developing MDE (RE) Insurance into a more sophisticated insurance and reinsurance vehicle. Currently the captive acts solely as a reinsurer, taking ceded risk from local insurers in the countries where its various projects and subsidiaries operate. We speak to all of our ventures out there to understand how they are procuring their insurance, what they are procuring as insurance and to see if there is a natural fit for the Mubadala captive insurer to participate, says Corney. We have covered a lot of our projects, and so we are participating in the majority of our Mubadala investments now as a reinsurer. Having the captive itself allows Mubadala to access the wider, global reinsurance market, particularly in Asia, which Mubadala has found to be especially supportive and receptive to the captives requirements. In some cases, particularly in energy-related insurance, it also deals with the more traditional European and US reinsurers. Mubadala is building long-term preferred relationships with the insurance and reinsurance market regionally and internationally. Currently the captive is focused on reinsuring energy, construction and operational property/ business interruption-related risks around the development and operation of many of Mubadalas projects. In some cases, it also takes one-off terrorism policies for its international projects. The biggest challenge facing the Mubadala captive around project-related risks, particularly for PPP projects requiring project finance, is a lack of a rating for the captive. In any international finance project there are minimum rating criteria for the security, explains Al-Suwaidi. So on financed projects, specifically internationally financed projects, where we were knocking at a projects door and say40 | QFCA
risks? But ultimately Mubadala is a big company and we like to think that we understand our risks better than others. And if you have the assignment process perfected you get the security you want. The absence of a rating also poses challenges for insuring joint venture partners risks. Mubadala writes a percentage of risk up to the equivalent percentage shareholding, even though the company has the ability to write a higher percentage. This is a consideration for the project and its shareholders. Like lenders, partners may be hesitant about the rating absence, but in many cases, they themselves have their own captive capabilities which they do not want eaten into by another captive. Looking forward, the ultimate goal for MDC (RE) Insurance is to start retaining some levels of risk. The next stage of its evolution will be to start analysing the potential tax benefits gained from the captive, something which the company has not done until now. In parallel, not content to sit back and allow its captive manager and captive broker, Marsh and Miller International, to do all the work, it is engaging directly with the market, regulators and brokers to build relationships and gain a better understanding. It clearly wants to be in a position where it can dictate how it wishes to proceed rather than relying on others to advise it. Corney makes it clear that forming a captive is not a straightforward proposition and something companies need to consider carefully. Have a very good, comprehensive feasibility study conducted, he advises. There is a danger because captive can become a buzz word, but having a captive doesnt always make good, sensible, strategic sense. For Mubadala, when you have got anything from aerospace to heavy industries to energy to hospitals, to try and get the commonality of premium spend is tricky. This is where a good, detailed feasibility study comes in to assess the risk profile of any entity. That said, our captive has already proved its worth and looking back we wouldnt have done anything differently. True to Mubadalas pioneering position in the Abu Dhabi economy and with MDC (RE) Insurance now firmly up and running, it is likely only a matter of time before other local companies follow in its footsteps. If captive insurance is to take off in the region, much will be owed to Mubadalas successful efforts in this sector.
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Alan Corney: Head of group insurance at Mubadala
The ultimate goal for MDC (RE) Insurance is to start retaining some levels of risk
ing that we want the captive involved, lenders logically look at the facility agreement and say Wheres your rating or give us some financials, give us some comfort?. This has probably been one of the biggest challenges. Aside from lender requirements, you also then have joint venture partners and at the project level the actual project management teams who quite rightly want to have minimum levels of security. So the way we have worked up till now to give that added layer of comfort is to explain, firstly, that it is 100 per cent pass through of risk at this time and, secondly, we will only use S&P A or better rated security. Thirdly, we agree to sign our reinsurance security on an as-and-when-required basis. This is the way we have navigated around in terms of lenders where it just creates that one extra layer of assignments and in turn gives them access effectively to A- security. It is very easy to talk about this, but its another thing to explain the innovative assignment process associated with MDC (RE)s reinsurance security to multiple parties, especially in this kind of banking environment. And in todays climate, which is all the more challenging, why would we want to take in any kind of
photograph: mubadala
Notes
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QFCA | MEED | 41
Notes
42 | QFCA
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QFC Authority Captive Insurance Roadshow

Abu Dhabi, UAE 8 December 2011 Intercontinental Hotel, Abu Dhabi Riyadh, KSA 29 January 2012 Venue to be conrmed
The roadshow will travel across the GCC region in 2012

For a full list of upcoming dates and locations, or to register interest, please contact Gil Barcelon on: Tel +971 (0)4 375 7995 Email gil.barcelon@meed-dubai.com
*References the 2008 Forbes Tax Misery & Reform Index
ONE PLACE DIVERSIFYING

Qatar. Where growth and diversification go hand in hand. Thanks to its world class regulation and a secure and transparent rule of law, the QFC has helped Qatar to become the regions most dynamic economy, and its perfect access point. The QFC can help you be a part of it. Benefit from the lowest tax in the world,* 100% ownership, repatriation of all profits and an onshore trading environment. Join us. www.qfc.com.qa
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THE GCC

CAPTIVE INSURANCE GUIDE

*References the 2008 Forbes Tax Misery & Reform Index

WEALTH YESTERDAY TODAY TOMORROW

The captive potential

ED JAMES, HEAD OF MEED INSIGHT, REPORT AuTHOR

The captive concept

Captive usage among international major indices (%)

Does use a captive

Does not use a captive

Source: Marsh www.meedinsight.com

ownership structures single parent captives

Structure of a single parent captive

Structure of a group captive

the direct-writing captive

the reinsurance captive

Source: MEED Insight

Structure of a captive with a separate fronting insurer

premiums pArent CompAny insurance risk

premiums Fronting CompAny insurance risk CAptive

the gCC CAptive insurAnCe guide

Structure of a protected cell company

Benefits of establishing a captive insurance subsidiary

the gCC CAptive insurAnCe guide

The captive establishment process

Source: MEED Insight

Captive operational functions

Parent corporation or association

Auditors Investment managers

Operating the captive

the gCC CAptive insurAnCe guide

Captive utilisation by sector of parent company

Technology and telecoms

Business underwritten by captives

Health/Medical Marine Product liability Financial products Property damage

Employers liability/ workers compensation

The main captive domiciles

US-Hawaii Other (US)

The regional captive market

GCC domicile: Dubai International Financial Centre

Comparison of GCC captive domiciles

Dubai International Financial Centre

Central Bank of Bahrain

Base capital requirements

Class 1 Captive: BD75,000 Class 2 Captive: BD300,000

Annual fees Other fees

No restrictions on foreign ownership No restrictions on insuring risks in Bahrain

the gCC CAptive insurAnCe guide

Riyadh: Saudi Arabia is yet to permit captive activity

Captives owned by GCC companies

Paid-up share capital ($m)

Not available Selfmanaged

Protected cell company Single

UAE Saudi Arabia

Protected cell company Single

Woodstock Insurance Company

The regulators position

Rulebook: The regulations will benefit joint ventures

the gCC CAptive insurAnCe guide

Risk: Emerging markets are generally less litigious

The case for captives in the GCC

Insurance premiums and assets (% of GDP), 2009

Mena=Middle East and North Africa. Source: World Bank