A Captive market
By afaq • Jul 10th, 2008Captive insurance may be gaining popularity elsewhere, but the concepthasn’t quite caught on yet with Middle Eastern companies.
Khalid A. Mohomed is fascinated by insurance. His days of training in the UK and the United States, and working as a risk management practitioner in the US in the 1980s make him something of a local authority on the subject. But Mohomed, who now works as a director at Dubai-based Dana Insurance Brokers, is surprised that something as useful as captive insurance has failed to capture the imagination of businesses in the Middle East.
This, in spite of the region’s asset boom – which is creating large physical assets that command huge insurance premiums. It provides a great environment for the growth of captive insurance, which consists of limited-purpose insurance companies established solely to finance risks for their parent corporations. They ensure some or all of the corporate risks remain within a group, and save profits that would normally be paid to a commercial insurer. A captive firm can effectively build up a fund to deal with flush years, and it’s usually more tax-efficient to do this through a captive than directly on the firm’s balance sheet. Captives also mean a reduction in the company’s dependence on commercial insurance.
“Captives are a risk management tool and not really an insurance mechanism,” Mohomed says, “even though when captives are formed to look after hazardous risks, then [they are] a form of self-insurance.” From another perspective, a captive is a legal accounting gimmick to save taxes. As a risk management tool, it’s useful to transfer risk from the corporate body to an outside funding mechanism.
“When you work on the balance sheet” in the United States, where corporate taxes hover around 50 percent, Mohomed explains, “you take your income and expenditure and then on the balance you work on the net profit before tax. But if you increase your outgo and reduce income, the profit goes down and you pay lesser taxes. To do just that, major corporations form their own captive insurance companies and register them mostly in a little island called Bermuda.”
This is where 29 percent of the world’s captives are based. Worldwide, the number of captives increased from 3,361 in 1997 to 5,119 in 2007, with Bermuda holding the most at 958 captive firms. With Dubai becoming a financial services hub, it should have by now become the first choice for the region’s captive insurers. But despite realizing their potential, captives haven’t been widely adopted.
