Barbados is a domicile for the future, according to Richard Ince and Graham Allamby.
Whatever else may be said of the year 2001, it was a dark period in the history of many insurers and reinsurers, of that there is no dispute. As a result, the international insurance community, as well as governments, must come to grips with the challenges that have emerged - and continue to emerge - from the rubble of the old comfort zones.
One outcome of the new reality is that leading captive domiciles have seen the largest-ever influx in new formations, and renewed interest in exploiting the value of the old ones. Dramatically rising reinsurance rates and restrictive underwriting terms have combined with new paradigms of risk and exposure to impart a renewed popularity to the traditional form of the captive insurance company.
This has amounted to `too much of a good thing' for some traditional offshore domiciles, appearing to push already strained infrastructure resources to their limits.
For the Barbados captive insurance sector, 2001 was also a watershed year. Having finally convinced the Organisation for Economic Co-operation and Development (OECD) to agree that Barbados was indeed a domicile that has always met best international practise, and should never have made the negative list, the island's name was finally exonerated by its removal from the controversial blacklist. For over two years, this issue had placed a damper on development in the domicile, as new company incorporations fell significantly from the established annual levels, during the years 2000 and 2001.
The island has relied heavily on its relationship with Canada to drive growth in the sector since 1987, and remains the largest domicile for Canadian-parented captives worldwide; approximately 55% of all Canadian captives worldwide are domiciled in Barbados. As a result, Barbados came to be considered as a domicile exclusively for Canadian captives. A slowdown in Canadian incorporations since 1999 also contributed to the reduced numbers of new captives.
By mid-2001, Barbados had also come to the realisation that it needed to re-establish its profile in the US, where it was once listed in the top three choices for US corporations. A concerted Barbados marketing plan was developed, and began in earnest during the fourth quarter of 2001, spearheaded by the Barbados Investment and Development Corporation.
When one considers the benefits that Barbados has to offer, particularly to US and Canadian corporations, it is surprising that the island is not seeing twice it current level of growth. Barbados has one of the most comprehensive dual tax treaties with the US, with significant withholding tax benefits (reductions from a level of 30% to 5% in many cases), applicable not just to insurance companies, but to all international business entities. This is significant, since the protection will apply whether or not the Barbados company passes US regulators tests as an `insurance entity'. As far as we are aware, this is the highest level of protection available in any offshore domicile.
Barbados-domiciled captives also enjoy protection under the `Permanent Establishment' clause of the treaty, affording them the opportunity to perform some activity onshore without being deemed to be engaged in a trade or business in the US.
Barbados insurance legislation is `converged', with the effect that a captive may incorporate in Barbados as a local company (QIC), essentially subject to the same laws and taxes as a domestic insurer, but also benefiting from foreign currency tax credit legislation available to any Barbados company. This can reduce the net effective tax rate to as low as 2.8% if more than 90% of the business income is non-Caricom. This scenario significantly strengthens the company's domiciliary links. The Canada/Barbados tax treaty permits repatriation of exempt surplus of a QIC.
The option to incorporate under the existing EIC legislation (annual fee $2,500 and no tax) remains.
Barbados has established a network of treaties with over a dozen trading partners, including the US, Canada, UK, Switzerland, China and Venezuela. These treaties offer enhanced opportunities for corporations with a presence on the island.
As a captive location, Barbados has several advantages over rival jurisdictions. It is a mature captive domicile; its Exempt Insurance Act was first passed in 1983. Since then, a number of updates and amendments have kept it current, with the most recent additions of branch office and protected/segregated cell account legislation.
No discussion of Barbados would be complete without mention of operating costs. The island has long been known as a relatively low cost domicile, and savings in overhead costs for a Barbados captive may exceed 30% when compared with its major regional offshore competitors.
It is also worthy of note that a portion of those savings may also be enjoyed by captives in other domiciles by contracting a Barbados entity to perform `back office' operations at lower cost without redomiciling, although that is also an option.
It is likely that before the end of 2002, Barbados' 400th captive insurance company will have incorporated on the island. This represents another milestone in Barabdos' development as a world-class domicile.
In addition, the island is internationally known and highly favoured as a top-class tourism destination and its constant year-round summer temperatures support robust winter and summer seasons, offering a high quality experience to leisure and business visitors alike, at all times of the year.
UI Management Inc.
UI Management Inc is a subsidiary of United Insurance, an established and highly respected Barbadian insurer with a Best's A- (excellent) rating and a Caribbean-wide client base.
UI Management provides an independent and innovative approach to captive insurance management and consulting for Barbados-based captives, emphasising its strong links to the Barbados business community, a high level of service excellence, a variety of ancillary services not generally provided in the domicile, and a totally unbundled fee structure.
We are confident that with all Barbados has to offer captives, and with its open approach to the international issues of transparency and exchange of information with its treaty partners, the island is set for a period of sustained and accelerated growth.
By Richard E Ince and Graham Allamby
Richard E Ince CIP CRM is a senior consultant at UI Management Inc, and Graham Allamby BComm, ACII, CGA is the company's president.