IN-financial-services-segregated-cell

Barbados: Tailor-Made For Segregated Cell Companies

 

10 November 2007

Barbados has long been a top contender as a domicile for international captive insurance. Since opening its doors to the international insurance market in 1983 with the Exempt Insurance Act, by 1986 Barbados had become the fastest growing captive insurance domicile in the world. Over the last 25 years, Barbados has consistently pursued a clear goal of ethical development as a treaty-based low tax jurisdiction and not a ‘tax haven’.

In developing and maintaining double-taxation treaties with a list of countries including Canada, U.S, U.K. and China, Barbados has positioned itself as a hub for international treaty-based business. Additionally, Barbados provides a well-educated professional workforce, stable government, easily accessible high-quality professional services, extensive telecommunications infrastructure and operational costs notably lower than competing domiciles. Overall, Barbados enjoys an enviable international business reputation while continuing to meet or exceed all guidelines set by international bodies such as the FATF, the International Association of Insurance Supervisors and the International Monetary Fund.

The Island also presents the most favourable regulatory environment for the establishment of captives, allowing the formation of a wide range of organizational forms with no restrictions on the amount of business taken from non-shareholder sources and no requirement for a company to be owned by its insureds. With an accelerated process for establishment and licensing along with capitalization and filing requirements designed to attract business, Barbados has certainly earned its reputation as a top location for captive insurance.

Barbados is one of several offshore domiciles whose legislation permits the formation of ‘Rent-a-Captives’. Unlike the traditional setup where the captive is wholly owned by the parent company, a ‘Rent-a-Captive’ is organized by an independent entity to insure the risks of several unrelated shareholders. A capital provider will register and capitalize the insurance corporation according to the legislation of the chosen domicile and issue shares to each participating shareholder. The participating shareholders will each pay a portion of the administration costs to the capital provider (usually apportioned as a percentage of the capital being rented). The independent shareholders’ insurance programs, or cells, are individually managed and all assets are kept separate.

Advantages offered by such a program encompass many of those of a traditional captive including flexibility in designing individual insurance programs, coverage for non-traditional risks, return on positive loss experience and good underwriting. The individual shareholders also enjoy the additional benefits of reduced administration costs and individual capitalization lower than that required by traditional captives. Through ‘Rent-a-Captive’ arrangements, the captive solution becomes a viable alternative for a wider range of companies. A ‘Rent-a-Captive’ best serves organizations unable or unwilling to commit the resources necessary to form a single parent captive or join with other organizations in a group captive.

In the interest of maintaining the island’s competitive edge, Barbados introduced legislation in 2001 using the language ‘Segregated Cell Company’ and ‘Separate Account’ after a careful review of similar legislation in other domiciles. The Segregated Cell Company builds on the ‘Rent-a-Captive’ concept and, while it can be used with a single parent or group captive as well, it is most commonly found in the RAC arrangement.

The downside of the RAC is that all individual cell assets as well as the ‘core’ assets are vulnerable to the loss experiences of the other cells. The instability, negative loss experience or insolvency of any one cell could forseeably result in the collapse of the entire structure as there is no guarantee that assets of one cell will be protected from the losses of another. The SCC model eliminates this potential vulnerability by keeping cellular assets legally separate from non-cellular assets as well as providing greater legal division between individual cells. In practice this arrangement provides protection for each cell from any negative experiences and creditors of the other cells. Each cell is legally independent and separate from the others as well as from the ‘core’ company.

An SCC setup can also further divide each cell into separate lines of insurance under a broader insurance program, adding to the overall result of that cell but isolated from the results of the other programs. As an example, a company with several cells each containing valuable assets has a level of protection for each cell from the insolvency of any other one cell. The ability to form, in theory, a limitless number of cells with reasonable additional costs for formation and administration further expands the potential of such a model.

A good analogy would be to say that whereas a traditional RAC would be a rented house with several tenants sharing expenses, an SCC would be a hotel with individually locked rooms, thick walls and separate, itemized bills for every guest.

As a relatively new concept, the full potential of SCC legislation has yet to be tapped and not all domiciles have yet enacted legislation enabling segregated or protected cell models. Potentially a very powerful business tool to enhance asset protection, privacy and asset management in the offshore industry, the development of SCC legislation across captive domiciles is being watched closely by the global business community. Much of the supporting legislation has yet to face serious challenge in court and the level of judicial support for the concept of segregation will be vital to the future success of the SCC. However, the legislation has been carefully devised and is considered to be sound.

Barbados’ involvement in SCC legislation reflects a continuing commitment to remain on the forefront of the international insurance industry. Barbados tempers its enthusiasm for growth with an abundance of caution and insists on application of international best practice standards in the screening of potential clients. The local Anti-Money Laundering Act and regulatory standards require full verification and periodic regulatory audits of all local managers

Apart from a host of new ways that are being found to utilise the structures, driving a surge of development in many of the leading domiciles, Barbados benefits from a lower overall cost of doing business, partly through its currency relationship to the US dollar (Bds $1 = US$0.50) and partly from lower general overhead costs.

Emerging as leaders in the field have been relative newcomers to the sector, such as Neace Lukens Management Services (Barbados) Ltd, a subsidiary of US Midwest brokers Neace Lukens, and their Barbados domicile business partners, UI Management Inc.

Of the (approximately) two-dozen SCCs currently operating in the domicile, Neace/UIM manage approximately half of them and the portfolio continues to grow steadily. They participated with their client in the first complete audit of a Barbados SCC structure for the 2005 financial year and were able to provide much valuable insight to the regulators during the conduct of the statutory review of the programme.

Jeff Kurz, the Columbus, Ohio based managing director of Neace Lukens, who is business leader for the Barbados operation, is enthusiastic about the domicile. Since we began working with our Barbados partners and the local regulators almost three years ago, it has been a generally positive experience, he said. We have found a knowledgeable, responsive partner in UIM, willingness to build and sustain a team environment, and an approachable and firm but amenable regulatory environment. The Barbados business model has shown favourable development in the first three years, and we expect it to continue.

In keeping with the domicile’s business model of careful, controlled development, Barbados tempers its enthusiasm for growth with an abundance of caution and insists on application of international best practice standards in the screening of potential clients.

Companies like Neace Lukens see this approach in a distinctly positive light. We prefer to do business in a domicile where regulatory oversight is vigilant, Kurz stated, “It gives us comfort, and it gives our clients comfort.”

Barbados not only continues to hone and develop its SCC regulations, with new capitalisation standards now under consideration, but is also examining the prospect of the “Incorporated Cell” structures recently introduced in some UK domiciles.

With the recent arrival in the domicile of USA Risk and Wilmington, two other US-based International managers specialising in Alternative Risk Transfer and cell structures, Barbados is well positioned for a significant acceleration of growth in the captive insurance sector over the next few years. Much of that will undoubtedly be in the area of SCCs.

About the Author

Richard Ince

Richard Ince

Richard Ince CIP CRM - Account Manager, CGM Gallagher Insurance Brokers (Barbados) Ltd. is a seasoned Barbados insurance manager and consultant with over thirty five years experience, over half of which have been in the international insurance field. In addition to an extensive underwriting and risk management background in Barbados and Canada, he spent several years in local insurance company management as well as a GM/Director of Barbados operations for a leading international Insurance consultancy. Richard has accumulated a wealth of experience in the Barbados International Insurance Sector through his involvement with a number of innovative programmes , including: * Setup of one of the first local insurer-owned Captive Managers in Barbados * Setup and management of major captive operations for US, Canadian, European and Caribbean corporations and Fortune 1000 companies * Setup of some of the earliest Segregated (Protected) cell and Separate Account structures in the domicile * Provision of Barbados domicile representation for US Insurance Intermediaries * Provision of management and captive consulting services in Canada for Barbados-based Insurance Group. A past president of the Insurance Institute of Barbados, Barbados International Insurance Asssociation (BIIA) and Vice-President of the Barbados International Business Association (BIBA), Richard is a regular presenter at conferences and seminars and has published a number of articles on the Barbados International Insurance Sector, including in both the 2008 and 2009 editions of ‘Business Barbados'. Richard holds a Chartered Insurance Professional (CIP) designation from the Insurance Institute of Canada and a Certificate in Risk Management (CRM) - Global Risk Management Institute.