At Invest Malaysia recently, Bank Negara governor Datuk Seri Muhammad Ibrahim(inset filepic) said 80% of transactions of ringgit/dollar trading in offshore markets were speculative transactions. Malaysia has long maintained that the trading of the ringgit should be tied to trade-related activity.
KUALA LUMPUR: The captive insurance industry may well be at a turning point and efforts should be undertaken to develop it, says the Governor of Bank Negara Malaysia, Datuk Muhammad Ibrahim.
He said on Wednesday the industry should be focused on better risk management, promoting macro-economic stability and encouraging new growth rather purely concentrated on tax planning.
“There are promising signs, among business and regulatory sectors, that there is a growing space for captives to play a role. It is important that we move forward to harness this potential, responsibly and thoughtfully,” he said.
He was delivering his keynote address “De-risking Asia: The growing role of self-insurance” at the Asian Captive Conference 2017.
Muhammad said captives have had, at best, an uneasy relationship with regulators. Captive insurance did not get off on the right foot with regulators.
To recap, in the early days of the modern captive, efforts to regulate captives were mostly ill-suited to the nature of the captive business, he said.
Prudential and market conduct regulations intended for the protection of the general public were applied equally to traditional and captive insurers.
Muhammad said this reduced the cost savings that captives were set up to achieve. In response, captives relocated and domiciled in jurisdictions with less onerous regulations, which on hindsight is an onerous consequence.
“Fast-forward half a century, captives are have an entrenched reputation for being tax evasion vehicles of large corporations. Offshore centers that are hosts to many captives have come under greater scrutiny, with stronger tax and regulatory regimes back on the cards to haunt the industry.
“We seem to have come full circle, and possibly still without a clear grasp of how captives, as well as the economics in which they operate, have fundamentally changed over time. This raises a risk that the captive and regulatory community may yet find itself caught wrong-footed (again!), with potentially higher stakes at hand,” he said.
Muhammad also pointed out risk awareness is now growing across the entire spectrum of businesses.
He cited the 2017 Allianz Risk Barometer, which covers mainly large corporates, as well as a 2016 Zurich study on SMEs revealed that cyber risk is topmost on businesses’ minds.
The same study showed that, in Asia Pacific, there are now twice as many SMEs that worry about cybercrime, fire, technological vulnerabilities, health and safety of customers or employees, and corruption compared to four years ago.
“Yet, in terms of preparedness for dealing with risk events, there is a marked disparity between large corporates, and mid-sized and smaller companies,” he said.
He noted that larger companies are the ones that tend to have a structured risk mechanism in place, as well as the resources and expertise to deploy risk management tools.
Larger companies, he said, also tend to have better access to specialist insurance products and the resources to establish a captive. Indeed, 90% of Fortune 1000 companies have a captive insurance company.
Muhammad said smaller and mid-sized companies are a different story, he said, as most do not consider captives as a feasible risk management option.
“However, this is changing with innovations in captive models, such as group and rental captives and protected cell companies. It is not only possible for smaller companies to engage captives. A more compelling business case is emerging for the use of captives as small and mid-sized businesses evolve,” he said.
On the outlook for captives, he said that three trends are worth noting.
First, captives are poised to move beyond the predominant focus on the single parent-captive model and the exclusive domain of large corporates. In fact, many non-profits entities in the US, and an increasing number of SMEs are accessing captives via group captive models that pool assets and share risks across its members.
The overlapping markets of the mutual, captive and takaful industries, is likely to provide an important impetus for the wider use of group captives among mid-sized and smaller companies.
This region is especially well-placed to harness this potential, given the vibrance of SMEs and fast growing takaful market.
Southeast Asia alone contributes almost 30% to global takaful contributions, and this offers an opportunity, as Malaysia has long sought to develop a facilitative regulatory environment to drive an innovative, competitive and sustainable growth of Islamic finance.
Second, technology will be a key driver and opportunity for new captive models. Technological advancements are already driving the growth of captive insurance business due to the new risks that businesses face.
As an industry founded in response to an inflexible insurance market, the history of captives is very much intertwined with innovation. The first captive can itself be seen as a disruption to the market!
Captives can be expected to leverage on new technologies to modernise legacy processes and systems, strengthen risk management capabilities and capture efficiency gains.
At the frontier of development, the evolution of Big Data and Insurtech has opened up significant new possibilities for segmenting and pooling of risk and capital, and tailoring solutions to specific needs and profiles.
Online platforms based on the group captive model and P2P insurance concepts are a case in point. Given that captives aim to provide specialised coverage that is not typically available in the traditional market, it is only natural for captives to operate in this space.
Third, Muhammad said there was likely to see greater traction in efforts to understand captives from a regulatory and supervisory perspective.
At a global level, there is a greater appreciation of the role and importance of captive insurers, including by the International Association of Insurance Supervisors (IAIS).
He said IAIS published two papers in 2006 and 2015, addressing the economic benefits of captive insurance and its relationship to traditional insurance and reinsurance markets.
More significantly, it recognises the importance of applying a supervisory regime that has due regard to the specific nature, scale and complexity of various forms of captives.
“A primary objective of regulation for captives is promoting financial stability. In this respect, regulators will continue to be concerned with risks that may be created as a result of arbitrage and distortions to the broader insurance market.
“Captives have an important contribution to offer. However, understanding risks relating to captives at a much deeper level, will be important to deliver regulatory outcomes that are proportionate and economically efficient,” he said.
Muhammad said captive risks will differ from traditional insurance, and they also vary significantly between different types of captives, depending on ownership and structure, scope of business and nature of risks insured.
Managing these risks cannot simply be addressed at an institutional level. Macroprudential measures might have relevance in certain circumstances.
For example, a pure captive insurer that merely underwrites the risks of its parent may pose low financial and consumer risks, but if the parent is an economically significant entity, with critical financial linkages, a different regulatory response and approach might be warranted.
“Broader measures need to be taken, both at a national and global level, to collect better data on captives to understand their nature, evolution and impact on macro-financial developments.
“Increased efforts by governments to tackle profit shifting and tax base erosion (BEPS) have been another factor behind recent regulatory developments,” he said.
Significant changes have taken place affecting offshore financial centers in the past decade, shaped by heightened expectations for enhanced transparency and exchange of information between tax authorities.
These winds of change are likely to pick up speed for captives. And they will change the way captives have operated in the past. Very likely it would pave the way for the transformation of offshore financial centers.
“Captives could metaphorsise from perceived brass plates models into legitimate commercial vehicles that serve a real economic purpose. Perception management is pivotal for the future existence of captives.
“Captives must be seen as supporting and contributing to the broader economic transformation and growth,” Muhammad said.
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