MENA regional focus: Captive interest on the up

The captive concept is not new to the Middle East. Indeed, some oil and gas companies in the region have been using captives for many years. However, these have tended not to be domiciled locally. One of the biggest, Al Koot, was initially incorporated in 2003 as a captive insurance company for Qatar Petroleum, but has since become a commercial insurer and reinsurer.

Until fairly recently, the concept was not very well understood other than by the very largest companies. So while captives are not new to the region, it has been a slow burner. Sebastien Loeffel, network partner relationship manager at AXA XL, says that while captives do exist, the use of captives is very limited and is growing at a slow pace.

But there are some signs that interest in the captive solution is increasing. According to Marsh’s recent 2021 Captive Landscape Report, between 2015 and 2020, captives have grown in every region globally – noting that the Middle East, where the existing number of captives was low, saw large increases. It says the number of captives with Middle East parents has increased by 20%.

According to an AM Best report published in the summer, interest in captive insurance companies is growing in the Gulf Cooperation Council (GCC) region as international commercial insurance rates harden. In the report, Best says that rising open market prices have sparked interest beyond the traditional users of captives in the energy and heavy industry sectors, and state oil enterprises.

It adds that the introduction of captive-specific regulation and the availability of experienced third-party captive managers to oversee the operations have made the process of establishing a new captive easier at the same time as hardening markets provide a strategic rationale for captive sponsors to retain more risk.

Rising interest
James Battersby, chief broking officer for central and eastern Europe, Middle East and Africa, Willis Towers Watson, agrees that the hard market is having an impact in the region. “Interest in the captive concept has grown in the past few years as the hard market has taken its toll,” he says. “To date, most captives of Middle East-based companies have been formed in offshore captive domiciles, where the experience and supporting infrastructure for operating captives is well established. The introduction of captive legislation within the Middle East region may encourage prospective captive owners to consider locating their captive locally, but for many companies new to the captive concept, they have preferred to trust in tried-and-tested managers and talent pools (both managers and non-executives).”

He adds: “As captive owners get used to the rhythm and requirements of captive ownership, some of these companies may look to lift and shift the captive to their preferred Middle East domicile, but we are not there yet.”

According to Best, existing GCC captive sponsors typically operate in sectors where the business model requires a large insurable fixed-asset base. Property, engineering and energy risks tend to dominate captives’ portfolios, with policies often including substantial business interruption limits. They also write liability covers, including D&O. It notes that historically, most captives in the region have acted as reinsurance captives, using a fronting commercial insurer to issue the insurance policy, and then retroceding most of the risk in the international reinsurance market.

Middle East domiciles
Should Middle East companies look to local centres to domicile their captive, there are a number of choices, with similar legislation and rules and regulations. The four that have introduced dedicated captive-specific legislation are Bahrain, Qatar, Dubai and Abu Dhabi. The regulations have tended to be modelled on international best practice, with similar features to well-established captive domiciles such as Bermuda and Guernsey.

The Bahrain Monetary Authority issued its first licence for a captive insurer in 2003. The Dubai International Financial Centre (DIFC) was established in 2004, followed by the Qatar Financial Centre (QFC) in 2005, introducing a regulatory regime for captive insurance in 2011, including protected cell company (PCC) legislation. Abu Dhabi Global Market, an international financial centre, opened for business in late October 2015. All four domiciles have PCC legislation.

The Abu Dhabi Global Market is a financial free zone that offers 100% foreign ownership, a 0% corporate tax rate, and application of common law. Similarly, the DIFC’s legal system and courts follow a common law framework and the centre offers 100% ownership and provides a 40-year guarantee of zero taxes on corporate income and profits, as well as the UAE’s network of double-taxation avoidance treaties with regulators and central banks. Marsh has a captive management operation in the DIFC and Abu Dhabi Global Market, while Aon also has an operation in Abu Dhabi.

Last year, the DIFC published new rules for the regulation of captives. Speaking at a webinar held by AM Best in January 2021, Ronny Vellekoop, senior executive officer at Marsh Captive Solutions, said the DIFC’s insurance regulations made it an attractive domicile, through applying rule waivers and rule modifications. “The DIFC has recognised that with the increased interest in captives, they need to amend their regulations slightly, based on the rule waivers and modifications that were happening anyway. So, a consultation paper came out a couple of months ago which stated that the rule waivers and rule modifications that had already been applied over the last 15 years or so should be formalised in the rulebook,” he said.

He added that the new regulations will make it far clearer for potential captive owners. “The regulations are clearer and more in line with other more established domiciles such as Guernsey or Bermuda. So, now a lot of domiciles look very similar. The rules in Guernsey are very similar to the rules in Bermuda, and are now also very similar to what we see in the DIFC. Cost-wise, regulation-wise, those financial centres are very similar, and the differences are just nuances,” he said.