CAPTIVE INSURANCE

CAPTIVE INSURANCE

GCC CAPTIVES INDUSTRY OVERVIEW INTRODUCTION

The Qatar Financial Centre (QFC) Authority has been spearheading the development of an international financial services centre in the heart of Doha, Qatars modern and ever-expanding capital. This aspiration is part of Qatars National Vision for 2030 which focuses on establishing a competitive and broadly diversified economy. A key pillar of the QFC Authoritys strategy is the creation of an international reinsurance and captive insurance hub, businesses which are enjoying significant growth in the Middle East. The GCC region boasts a large projects market, with over US$ 1 trillion worth of major new projects expected to be completed by 20201. As governments in the region look towards increasing efficiencies and undertake diverse projects, the region is witnessing an increase in private participation in public projects. Close to US$ 49 billion in projects across the GCC region have been executed as Public Private Partnerships over the past two decades2. This increase in private participation and related transfer of assets from governments to corporate institutions is leading to more stringent reporting and control requirements. As a result, GCC corporate institutions appetite for risk and approach towards risk management are evolving rapidly. Against this backdrop, the GCC corporate sector presents significant potential for the growth of captive insurance. This potential is complemented by an increasing presence of international reinsurers within the region, providing potential captives with greater proximity to well-rated international reinsurance capacity and expertise. Backed by a substantial pipeline of commercial and public projects, GCC countries agenda for economic diversification, and a rapidly evolving risk management landscape, the GCC region presents significant potential for growth in the captive insurance sector.

QATAR FINANCIAL CENTRE

The Qatar Financial Centre (QFC) is a financial and business centre established to grow and develop Qatars financial services sector, a key element of the countrys strategic development agenda. The QFC provides a state-of-the-art platform for international, regional and local financial services firms wishing to do business in Qatar and the region. A fully onshore centre, the QFC is a unique model in the region, and one that an increasing number of financial firms are taking advantage of. The strong potential for growth in the regions (re)insurance sector and the QFCs presence as a robust platform to access this growth has been instrumental in attracting many well-known international firms to Qatar. Leading global players like AXA, Marsh, and Zurich are already established in the QFC alongside major local firms including Q-Re, QIC International, and SEIB Insurance and Reinsurance Company. Moreover, several other local (re)insurers, including Qatar General Insurance and Reinsurance, Al Khaleej Insurance and Reinsurance, Doha Insurance Company and Qatar Islamic Insurance operate in the State of Qatar.
Source: 1. MEED Projects 2. MEED, Markab Advisory

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WHY SET UP IN THE QFC?

COMPETITIVE TAX ENVIRONMENT

The QFC offers a highly competitive tax environment, which applies a corporation tax of just 10% on profits that are sourced locally. Moreover, the QFC also applies a concessionary zero rate of tax to captives. Captive managers are subject to the normal QFC tax rate.

STRONG REGULATORY FRAMEWORK

QFC licensed firms operate in a world-class regulatory environment which meets the standards of many recognised and long-established international jurisdictions. The QFC Captive Insurance Regime is one of the most developed captive regimes in the region and offers captive parents a wide variety of options to structure captives.

Qatar has also signed double taxation treaties with 37 different countries, including the UK, Luxembourg, Switzerland, Netherlands, China, and India, with further treaties underway in 2012.

A FULLY ONSHORE OPERATING ENVIRONMENT

The QFC provides a fully onshore platform for financial services and related firms to access Qatars and the regions growth. Unlike other financial centres operating in the GCC region, the QFC is not an offshore centre, nor does it operate within a free zone. All firms in the QFC operate on an onshore basis and can transact in both international and local currency. Captives domiciled in the QFC can underwrite domestic risk within Qatar, as well as international risk.

A WORLD-CLASS LEGAL ENVIRONMENT

QFC licensed firms benefit from a world-class legal regime that is based on the English Common Law and entails legislation, including employment and immigrations laws, different from and operating parallel to the laws of the State of Qatar. Moreover, there are no foreign ownership and currency trading restrictions, and full repatriation of profits is allowed.

FAVOURABLE OPERATING ENVIRONMENT

For companies considering the region, Qatar offers a highly favourable operating environment. The World Economic Forums Global Competitiveness Report ranks Qatar highest in the Middle East. Doha, Qatars capital city, boasts an ample supply of high quality office space and Qatar Airways offers air links to over 100 destinations around the world with frequent flights servicing the MENA region.

INDEPENDENT JUDICIARY
QFC licensed firms have access to an independent judiciary including the QFC Civil and Commercial Court, and the QFC Regulatory Tribunal. Two internationally renowned figures head the Court and the Tribunal respectively: The Rt. Hon. The Lord Woolf of Barnes, is the President of the QFC Civil and Commercial Court, and Mr. Michael Thomas QC is the Chairman of the QFC Regulatory Tribunal.

RAPIDLY MODERNISING FINANCIAL SERVICES INFRASTRUCTURE

As Qatars financial sector continues on its path of development, the Government remains committed towards providing strong and credible support for modernisation and growth in a wide range of areas. This includes initiatives such as the establishment of Qatarlyst, a web-based trading platform for the insurance and reinsurance industry, and the establishment of the Qatar Finance & Business Academy (QFBA), a world-class educational facility that provides professional training and certification services for financial services industry professionals.

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QFC CAPTIVE INSURANCE REGIME

The QFC Regulatory Authority, the independent financial regulator of the QFC, applies a principles-based approach to authorise and regulate firms and individuals conducting financial services in or from the centre. The QFC business standards and regulatory environment conform to international best practices and will be familiar to businesses currently operating in major financial centres around the world. The primary rulebooks pertaining to captives, captive managers and PCCs in the QFC are the Captive Insurance Business Rules 2011 (CAPI) and the Insurance Mediation Business Rules 2011 (IMEB). These rulebooks were drafted after thorough review of state-of-the art international regulatory frameworks applicable to captives and captive managers, and after extensive consultation with specialist practitioners and the general public. Enacted from 1 July 2011, the new Captive Insurance regime is focused on creating a robust platform for the development of Qatars captive insurance sector. A captives minimum capital requirement is the highest of the following: (a) the base capital requirement, (b) the premium risk component, and (c) the technical provision risk component. An example of a minimum capital calculation for a captive conducting general insurance business would be as follows:

CAPITAL REQUIREMENT AND ELIGIBLE CAPITAL FOR CAPTIVES

The QFC Captives regime incorporates a prudential framework that has two main components: 1. A base capital requirement; and 2. A risk-based capital requirement that consists of a premium risk component and a technical provision risk component.

TYPES OF CAPTIVES PERMISSIBLE IN THE QFC

The QFC regime sets out four classes of captives based on the captives ownership structure and the kind of risks the captive may insure. In order to conduct captive insurance business a captive must be incorporated in the QFC (i.e. branches of captives are not permitted in the QFC), the four classes of captives permissible in the QFC are:

Capital requirement is the HIGHER OF:

Class 1

Class 2

Class 3

Class 4

a) Base capital requirement (USD) May underwrite unrelated third-party risks? No PLUS charge on net written premium in excess of US$5 million Yes c) Claims charge on net claims reserve on property insurance, No PLUS claims charge on net claims reserve on liability insurance b) Premium charge on first US$ 5 million of net written premium,

$150,000

$400,000*

$250,000

$1,000,000*

Description Single-owner captive that insures only the risk of its parent or affiliates. Captive where up to 20% of its gross written premiums are related to third party risks. Multi-owned captive that insures only the risks of its owners or affiliates A broad type of captives class that undertakes other types of captive insurance

20%

20%

20%

20%

Class 1

15%

15%

15%

15%

Class 2

5%

5%

5%

5%

Class 3

Class 4

Yes

15%

15%

15%

15%

Class captive 4, a first of its kind in the GCC region, provides the QFC Regulatory Authority with flexibility to assess more innovative captive insurance structures on a case-by-case basis.

*Unless the Regulatory Authority determines another amount appropriate in the circumstances having conducted its assessment of the captive proposal

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The technical provision risk component for all classes of captive insurers that conduct life insurance business is 2.5% of the policyholder liabilities calculated using actuarial methods for life insurance. The CAPI rules also set out the financial instruments that are eligible to meet the captives minimum capital requirement. In addition to the more conventional instruments such as permanent share capital and retained earnings, the QFC Regulatory Authority can also consider other financial instruments such as a qualifying letter of credit, provided specific requirements are met.

APPLICATION & LICENSING

APPLICATION PROCESS: CAPTIVES
In order to establish and operate a captive in the QFC, a captive parent would need to approach the QFC Regulatory Authority for appropriate authorisation. A captive parent may also approach a QFC licensed captive manager. The Captive Manager would then facilitate the required process for the captive establishment with the QFC Regulatory Authority. An authorised PCC must obtain the written consent of the Regulatory Authority before creating each new cell. A captive parent seeking to establish a captive in the QFC would need to complete form Q22. This form covers applications from those seeking authorization of either a captive (Classes 1 to 4) or a new PCC (whether core only or core and individual cells) Senior Executive Function Executive and Non-Executive Governance Functions Compliance Oversight Function Risk Management Function Finance Function Money Laundering Reporting Officer (MLRO) Function Customer Facing Function QFC Form Q03 will need to be submitted for approval of individuals to perform certain key functions on behalf of the applicant. Typically, these are individuals carrying out controlled functions i.e. :

CAPITAL REQUIREMENT FOR CAPTIVE MANAGERS

Captive managers in the QFC must maintain a minimum paid-up share capital of USD 50,000 and a net asset value (defined as tangible and liquid assets minus liabilities) of at least half of the minimum paid-up share capital.

OTHER APPLICATION REQUIREMENTS

CAPITAL REQUIREMENT FOR A PCC

A PCC would normally be a class 4 captive because it insures the risks of unrelated third parties, however, individual cells may fall into any of the other classes depending on the ownership structure and type of business being conducted within the cell. An individual cell cannot simultaneously conduct general and life insurance business, and a PCC must obtain the consent of the Regulatory Authority before it establishes each cell. A PCC must hold minimum non-cellular capital of at least USD 50,000. The noncellular eligible capital required by the QFC Regulatory Authority will increase if the cells have recourse to the PCCs non-cellular assets. An individual cells minimum capital requirement is the higher of the premium risk component or the technical provision risk component (i.e. only the risk-based capital requirements).

Actuarial Function

APPLICATION PROCESS: CAPTIVE MANAGERS

In order to establish and operate in the QFC, a captive manager would be required to submit a business case to the QFC Authority. Upon successful review of the business case, the captive manager would liaise with the QFC Regulatory Authority for authorisation. A captive manager seeking authorisation by the QFC Regulatory Authority must complete and submit the QFC Form Q02.

Applicants are also required to submit Form CRO 1 (application for the incorporation of a Limited Liability Co)

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APPENDIX
APPROVED INDIVIDUALS: CAPTIVES
Approved individuals of a captive manager may carry out the controlled functions for which they are approved, in respect of a number of different captives managed by the captive manager.

WHAT IS A CAPTIVE?
A captive insurance company (captive) is an insurance company that is formed to insure or reinsure the risks of its parents or affiliates of the parent. Corporate entities primarily establish captives as vehicles to reduce the total cost of risk and to seek greater control over the management of their risks. On occasions, captives also insure unrelated third party risks. A captive offers the potential of retaining underwriting profits and investment income which otherwise would accrue to insurance companies. At times, establishing a captive may also be a response to a lack of appropriate risk management options from the conventional insurance market, for example in the wake of a massive rate hardening.

APPLICATION AND ANNUAL FEES*

The application fees for establishing a captive insurance business, captive management business, or a PCC at the QFC are as below:

Application fees (USD) Typically, captives are managed by Captive managers, firms that undertake the administration and the Captive Class 1, 2, 3, or 4 PCC core only 5,000 8,000 8,000 + 1,000 per cell 1,000 per cell A protected cell company (PCC) is a legal entity that is separated into legally distinct portions or cells. Captive manager 1,000 Each cell has its own separate portion of the PCCs capital and the income, assets and liabilities of each cell are separated from all other cells. *Annual Fees prorated for the first year of operation A PCC enables smaller companies to adopt a captive solution without having to meet the significant capital requirements attached to a single parent captive. In addition. PCCs come with lower operating, governance and compliance expenses. A legal entity can be established as a PCC under the QFC Companies Regulations 2005 and the QFC The QFC understands the importance of adaptability and openness to change in order to succeed in the current dynamic and competitive environment. Continuous consultation and review are necessary in order to ensure the presence of a robust yet business friendly business environment at the QFC. The various QFC entities recognise this fact; a pertinent example of this is the recent implementation of an e-submission platform, which allows authorised firms at the QFC to submit their regulatory filings electronically, by the QFC Regulatory Authority. On the regulatory front, the QFC Regulatory Authoritys recent implementation of the Insurance Mediation Business Rules (IMEB), and the Captive Insurance Business Rules (CAPI), along with requisite updates to other rulebooks, is the result of an extensive consultation process and is focused on providing a strong foundation for the successful development of these markets in Qatar. captives regime is designed to allow a PCC to conduct captive insurance business. management of a captive. Captive management is considered as a regulated activity in the QFC and is subject to the provisions of the Insurance Mediation Business Rules 2011 (IMEB).

PCC core and individual cell(s)

WHAT IS A PROTECTED CELL COMPANY?

Cell(s) of an authorised PCC

GOING FORWARD

CONTACT
For more details, please visit our website www.qfc.com.qa or write to us at captives@qfc.com.qa For more details on CAPI and IMEB, visit www.qfcra.com For more details on QFC Tax Regulations, visit www.qfc.com.qa/Files/QFC_Tax_Regulations.pdf

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Qatar Financial Centre Authority Tower 1, Diplomatic Area P.O. Box 23245, Doha Qatar Tel: +974 4496 7777 Fax: +974 4496 7676 info@qfc.com.qa www.qfc.com.qa

Published in March 2012