Financial Solutions

Captive Incorporation in Domicile of Choice

JLT Asia can help you to choose a captive domicile. There are upwards of 20 locations worldwide that have passed captive legislations in one form or other. By considering clients’ detailed requirements, JLT can help you to shortlist the most appropriate domiciles. Below are details of three major centers which are politically stable and which are well-regulated domiciles offering a low tax environment, where we have successfully established and managed captive operations for our clients in the Asia-Pacific.

Hong Kong: Passed captive legislation in 1997. No PCC legislation to date.
Singapore: Asia's leading captive center. No PCC legislation to date.
Bermuda: The world's leading centre, and home to many PCCs. As the only domicile listed with PCC legislation, should a PCC structure be chosen it would need to be here.

Hong Kong
The Insurance Companies (Amendment) Ordinance 1997 allows certain concessions to captive insurers. These concessions are designed to attract multinational conglomerates to establish their captive insurers in Hong Kong. There are so far only a handful of Hong Kong captives.

The key regulatory issues are as follows:

• Underwriting Restrictions: Captives may not write Hong Kong statutory covers such as Employee Compensation and Motor Liability, other than as reinsurance. A Hong Kong based captive could therefore participate in ECI as a reinsurer of a locally licensed insurer. We are currently placing ECI into captives for Hong Kong clients.
  
  
• Captives are also restricted to the insurance businesses of the parent or group companies or their associated companies.
  
  
• Minimum Capital Requirement: HK$2 million (HK$10 million for commercial insurers).
  
  
• Solvency Margins: A captive must maintain a solvency margin the greater of 5% of net premiums written, 5% of net claims outstanding or HK$2,000,000, as opposed to a commercial insurer requiring 20% and HK$10million.
  
  
• Requirements for Assets in Hong Kong: Captives are exempted from the usual requirements applicable to insurers (who need to maintain assets in Hong Kong of an amount not less than 80 percent of its Hong Kong liabilities plus solvency margin).
  
  
• Valuation Regulation: Assets and liabilities of a captive may be valued on the basis of Generally Accepted Accounting. Principles as opposed to the statutory basis as prescribed by Valuation Regulation.
  
  
• Regulatory Costs: A HK$22,600 annual and authorization fee.
  
  
• Income Tax: Hong Kong captives are subject to the prevailing corporate tax rate in Hong Kong and although underwriting profits from offshore risks are taxed at 50% of the prevailing tax rate, this is of little incentive for a captive we assume would write entirely Hong Kong-based risk.

Singapore
Singapore is the largest and most established captive domicile in the Asia Pacific region with 53 captives registered. Singapore captives are regulated under the terms of the Insurance Act (Chapter 142) and accompanying regulations, the key features of which are as follows:

• Underwriting Restrictions: Captives are restricted to the risks of the parent or group companies, and companies in which the parent holds at least a 50% shareholding. However on application to MAS other 'third party' risks may be assumed provided the parent can control the risk.
  
  
• Minimum capital requirement: S$400,000 (HK$1.8million)
  
  
• Solvency margin: S$400,000 surplus of assets over liabilities
  
  
• Investment restrictions: None. Investments in the captive parent or related companies are allowed and counted as assets for solvency margin calculation
  
• Regulatory Costs: S$5,000 (HK$22,500) annual license fee
  
  
• Income Tax: The full corporate tax rate in Singapore is 18% but captives have the option of electing a concessionary rate of 10% on profits from non-Singapore based businesses. We expect a Hong Kong parent would want to take up that option for a Singapore domiciled captive.

Bermuda
Underwriting restrictions: Bermuda has a multi-license system of regulation that categorises non-life insurance company operations into four classes. A captive insurance company would typically apply for a license in Class 1.

CLASS 1: A single parent captive insurance company owned by one or more affiliates of a group and underwriting only the risks of the owners of the insurance company and affiliates of the owners. Class 1 insurers are required to maintain a minimum capital and surplus of $120,000 (HK$936,000) but in practice usually require considerably more - more likely $250,000.

CLASS 2: Multi-owner captives which are defined as insurance companies owned by two or more unrelated persons provided that the captive underwrites only the risks of the owners and affiliates of the owners and/or risks related to or arising out of the business or operations of the owners and affiliates. A Class 2 license will also apply to single parent and multi-owner captives writing no more than 20 percent of net premiums from risks which are not related to or arising out of the business or operations of their owners and affiliates. Class 2 insurers are required to maintain a minimum capital and surplus of $250,000 (HK$1,950,000).

CLASS 3: Applies to insurers and reinsurers not included in Class 1, 2, or 4. This includes finite reinsurers; reinsurers writing third party business; insurers writing direct policies with third party individuals; single-parent, group, association, agency or joint venture captives where more than 20 percent of net premiums written is from risks which are unrelated to the business of the owners. Class 3 insurers are required to maintain a minimum capital and surplus of $1 million (HK$7.8million).

CLASS 4: Insurers and reinsurers underwriting direct excess liability insurance and/or property catastrophe reinsurance risks. Class 4 insurers are required to maintain a minimum capital and surplus of $100 million (HK$780million).

Other factors to consider include:

• Solvency Margin: A solvency margin must be maintained as follows:

• Investment restrictions: 75% of assets counting towards the solvency margin must be of approved classes. Loan backs to the parent company may not be so approved.
  
  
• Regulatory Costs: $8,320 (HK$65,000) annual government fee based on Class 1 license and $2.44m capital required to meet solvency margins.
  
  
• Income Tax: There is no income tax in Bermuda, based on an exemption guaranteed to at least 2016.

Basis of decision
The domicile chosen must be one that best meets the objectives of the parent. Factors to bear in mind are:

• Structure: If rent-a-captive/Protected cell is required, neither Hong Kong or Singapore currently qualify.
  
  
• Capital: Whilst using a PCC avoids the need to capitalize, all three domiciles have similar capital requirements for wholly owned captives.
  
  
• Costs: Whilst a PCC is slightly less expensive to form and operate, it is only available in Bermuda, which is also the most expensive of the domiciles. In general, Singapore is the least expensive, 20% below Bermuda's total cost and approximately 5% below Hong Kong.
  
  
• Expertise: Bermuda is the world's leading captive centre while Singapore is Asia's leading centre. Hong Kong has relatively few captives and hence little local experience. We would address that by supporting our Hong Kong operation from our existing office in Singapore. Likewise, should Bermuda be selected, we would act as local liaison with our Bermuda office to avoid time and distance problems, as we already do for a number of Hong Kong clients with Bermuda captives and PCCs.
  
  
• Taxation: A Hong Kong captive would be subject to full Hong Kong taxation. A Singapore captive could elect to be taxed at 10% on income, whereas a Bermuda captive or PCC would not be subject to income tax.

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