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Captive use starts to spread in Latin American market

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More Latin American companies are embracing captive insurers, but some countries' rules and taxes increase the hurdles to establishing a captive.

Corporations headquartered in Colombia and Mexico have led the way in utilizing captives to cover a wide range of exposures, but companies in Chile and Peru have more recently joined the captive bandwagon, captive experts said.

“The story of Latin America and captives isn't just a Mexico and Colombia story anymore,” said Sean Rider, New York-based managing director of consulting and development at Willis Towers Watson P.L.C.'s global captive practice. “It's now pushing down into South America and we're pretty bullish on that space.”

The captive growth is being driven partly by the fact that large infrastructure projects are being developed in Peru and a pro-business mindset in Chile, said Andrew Cater, vice-president and senior underwriter at Aon Risk Solutions in Grand Cayman, Cayman Islands.

Latin American countries have well-established insurance and tax regulations, as well as corporate risk managers who are more willing to talk about alternative risk transfer options, said Maria Escobar, head of captive solutions for Latin America at Marsh L.L.C. in Bogota, Columbia.

However, captives face a challenge in Latin America in the double fronting of captives, where many countries' regulations require a local insurer and reinsurer to act as fronting carriers for the captive and take on some portion of the risk, experts said.

“In most of the cases, we can find a way to solve the problem and to have a negotiation with the carrier and the reinsurer,” Ms. Escobar said. “But in other cases, this is a deal-breaker because sometimes it's so expensive to have both.”

Captive challenges

In addition, certain Latin America countries have laws or tax regulations that challenge the use of captives, experts said.

Ecuador enacted reforms effective Jan. 1, 2015, that made it cost prohibitive to reinsure to most captive domiciles other than the United States and the United Kingdom. The reforms led to the imposition of significant taxes on the reinsurance premiums paid by companies headquartered in Ecuador to the local insurers issuing domestic policies, which would then pay premiums to the fronting reinsurer that eventually flow to the captive's domicile.

“Taxes imposed on reinsurance premiums paid to the U.S. and U.K. are modest in comparison, and fronting for captives via these countries is possible as a result,” Mr. Cater said. “However finding fronting companies in the U.S. and U.K. can in itself prove challenging.

Legislation passed in Brazil in 2007 eliminated the Brazilian Institute of Reinsurance's state monopoly over the reinsurance sector. The IRB did not have the capacity to reinsure all risk, so prior to the change some Brazilian companies created captives to retain some of their risk and cede it to the international market. However, conditions such as minimum capital and minimum ratings in the legislation made it difficult to use captives, said Bruno Freire, CEO of reinsurer Austral Re in Sao Paulo.

“Basically, what we've seen is that these captives were not being used that much after the opening of the market, and we haven't seen more Brazilian companies opening new captives,” he said.

Mr. Cater has more hope for increased captive activity in Argentina, which has favorable insurance laws and a new government.

“Argentina always had a lot of interest in captives, but because of perhaps uncertainties over foreign exchanges in the past, that ambition was not realized,” he said. “With the new government there, I would expect that activity in Argentina to pick up quite quickly.”

The vast majority of captives established by Latin America-headquartered companies are not domiciled in the region as only Panama has a captive law, Ms. Escobar said. Other Latin American countries have not moved to pass captive legislation as insurance regulators generally do not have the necessary expertise to develop such regulations, she said.

“I don't see that happening in the near future and that's why we have to keep thinking in other domiciles,” Ms. Escobar said. “Not even in Mexico and Colombia, who are more into captives or more developed in terms of insurance, I haven't seen a single initiative” to establish captive domiciles in the region.

Bermuda, an early marketer to companies in Latin America, accounts for the vast majority of the domiciled captives, with Barbados and Cayman Islands being players as well, experts said. Puerto Rico has recently made major efforts to capture business with attractive captive and tax regulations, although the United States and Europe are generally not domicile destinations for Latin American companies unless they have operations in those regions, they said.

Latin American companies also are using cell captive structures due to pricing differentials or a cell effectively being a “nonowned” structure to lower premium levels that would perhaps not be cost-effective in a single-parent captive, but it is unclear how many cell captives have been formed by these companies, he said.

Overall, captive experts see the potential for expanded use of captives in Latin America, although more work needs to be done to fully propel growth.

“What we need to be doing as an industry is actually providing more money and effort in training our colleagues in Latin America to be able to provide most of the services themselves,” Mr. Cater said.