Companies in Singapore resist the lure of captives

Singapore is the primary captive domicile in Asia. There are 60 captives domiciled there, but few are owned by companies from the island state.

It appears somewhat surprising, for a country renowned for embracing opportunity, that its native businesses appear reluctant to buy into the notion of captives.

There are several reasons behind this – and some misconceptions, as Marsh senior vice president, communications, media and technology Sirikit Oh explains.

“There’s a change of mentality here when you talk about non-insurable risk,” she says. “The fact is the company is already retaining the risk in one form or another by not formalising the tools to manage that by way of captives.

“The challenge is to change the mindset and to formalise this as a strategy, using captives as one of the tools. But if you cannot get across the concept of a change of mindset, the next conversation would not start.”

Market too soft

JLT Specialty Asia managing director of strategic risk solutions Philip Ondaatje believes it is the softness of the market that deters companies even considering captives at the outset.

“Risk transfer pricing and imposed retentions are at levels that do not favour the use of alternative vehicles,” he says. “What you can trade off in Asia and the Asian market from a deductible viewpoint, for instance, is still relatively low.”

But what else can companies do in terms of risk protection that is not covered in the market? The growth of captives for risks such as pandemic coverage makes sense to many companies around the world that have chosen this option, yet still it does not attract business from Singapore.

Firms can get traditional risk transfer on a cost-effective deal for property and casualty, but why have captives not taken off for the other part of the business?

Few local captives

To the casual observer, it might appear strange that while Singapore is the leading domicile for captive insurers in the region, very few Singapore-based firms have formed local captives. Daniel Koepfer of NMG Risk Solutions says the reason is logical.

“Singapore has a specific tax law that distinguishes between on- and off-shore business,” he says. “Off-shore is defined as non-Singapore business. This means neither the location of the insured risk or the place of incorporation of the policyholder can be in Singapore. Therefore, Singaporean companies are often better off forming a captive in another domicile.”

There’s also a misconception of some risk managers in Singapore regarding captives and tax. One Singapore-based risk manager who wished to remain anonymous told StrategicRISK Asia: “The issue with captives relates to tax. Singapore companies do not enjoy benefits here.

“In terms of onshore risk, they are still subject to tax that is 17%, unless they have off-shore business, and then they are affected by profits tax.”

Tax issues

However, the logic of this is flawed, according to Dylan Bryant, Asia Pacific head of customer, distribution and marketing for Zurich Insurance’s IPZ (International Program Zurich). “I am not aware of any captive in the world that has been set up to avoid profits tax,” he says.

“The captives here will get a deferral. The captive here is never going to reduce your tax bill, merely defer it. This should not be an issue that would have stopped any Singapore business setting up a captive.”

Outside Singapore, compliance is often the main driver for establishing a captive – for example, in Australia.

Bryant says: “It doesn’t matter where the captive is set up, because they can write the risk directly into Australia without having to issue a policy in that jurisdiction, so you are still able to take that risk.

“It is the same in Singapore. A lot of people get caught up in the issue of tax, but the reality is there just has not been a conversation about captives in many businesses in Singapore.”

Market perspective

While there has been a degree of interest in the Singapore captives market in recent years, there has also been a distinct lack of activity.

Until last year, Koepfer was running Aon’s captive management and consulting business in Asia. Then he left to establish a captive management division at NMG, a much smaller independent firm.

While you might assume that such a move would indicate the captive management business is booming, Koepfer says quite the opposite is true.

“One of the main reasons we thought it was worthwhile starting NMG Captive Management is the lack of growth caused by the absence of independent captive managers in the region,” he says.

“Until we started, there was no independent captive-management or consulting firm in Singapore. That is particularly relevant for the mid-sized market, where many clients are served by brokers who do not have their own captive management offering.

“These brokers would be very hesitant to support the set-up of a captive structure, knowing it’s going to be managed by a global broker, because they are aware of what will happen in one or two years.”

Draw of premium rises

Certainly, a rise in premiums in Asia would raise interest in captives. An increase in the number of companies in the region becoming multinational and taking on new exposures is another possible catalyst for new captive business.

However, Koepfer points out that the captives market in Asia suffers from a lack of qualified consultants to provide tailor-made advice to clients.

“The major brokers are focusing more on administration, reporting and accounting, as it’s only one part of their business and the broking yields much higher returns than the captive management,” he says.

Koepfer believes captive managers that are independent from the brokers will examine an organisation’s insurance structure from a different perspective.

“It’s like going to another doctor to get a second opinion,” he says. “Many times, the doctors will agree, which gives you comfort that you’re doing the right thing. But sometimes you get a different opinion and then it starts to become interesting.”

Some Singapore risk managers need no convincing on the merits of captives. Gabriel Chew, Inter-continental Oil and Fats senior manager for group risk management and insurance, believes there are more benefits to captives than just covering uninsurable risk.

“Captives could be part of the overall financial objectives of a company,” he says. “In Singapore, interest rates are really low. You can set up a captive without so much money and literally transfer back the money to the parent company as a loan – and that is one way of managing the assets of a company.”

Tipping point

But as the captives sector grows across the region, Singapore is unlikely to be left behind. Gemma Brewster, head of captive services for Riscus Risk Management Services, believes Asia is “on the cusp of a captives revolution”.

“Captive formation for corporates in Hong Kong, Singapore and China is starting to expand. Specialist advisers who have knowledge of the region and its corporate customers are crucial to ensure this growth provides sustainable and long-term value,” she says.

“It is vital that risk managers have all the information they need to make informed decisions about how best to use their captive, and when to set one up.”