Reflecting on the success of our recent captive conference in Shanghai, I cannot help but see parallels in the potential development of captives in China to that seen in U.S. and Europe.
U.S. and Europe: From Offshore to Onshore
U.S. companies initially formed captives offshore, in Bermuda and Cayman, as these domiciles offered the tolerant regime necessary for these entities to flourish. The State of Vermont identified an opportunity and rolled out a regulatory regime equivalent to that offshore but with the added bonus of the reputation of an onshore location. The captive business migrated onshore! Subsequently other states copied Vermont and have developed significant captive portfolios.
In Europe, the offshore domiciles of Guernsey and Isle of Man were in the vanguard of attracting captives. In response, Luxembourg and Ireland offered sympathetic regulatory regimes and were successful in building up a robust book of captive business. In turn, Malta and Gibraltar have sought to establish themselves as captive centres by promoting a business-friendly approach with the label of an EU state.
China Repeats the Pattern
Chinese captive business is flowing to Hong Kong, which is acting as an “offshore” domicile in terms of its style of regulation.
Will Chinese provinces respond and offer a comparable mainland proposition? The evidence to date suggests not, with a seeming reluctance to lower the regulatory bar for captives retaining first-party risk or introduce competition into the domestic insurance marketplace. This could result in a major opportunity lost to consolidate premiums on the mainland (and feed the local insurance market) as multinationals will direct their overseas premium spend to captives in Hong Kong or other competing non mainland domiciles.
Free Trade Zone Model
The free trade zone in Dublin is a great example of business success, and the creation of an enabling environment through removal of trade barriers leading to the creation of an international insurance centre and encouraging innovation in the captive industry.
Maybe the Shanghai Free Trade Zone should reflect on this lesson in history and take a risk by introducing progressive regulation (and taxation!) of captives proportionate to the risk captives pose. A bold move, but as we have seem from history, the benefits of first-mover advantage are extremely high. London and Bermuda evolved into world leading insurance markets on the back of their captive proposition.
Is Shanghai to be the world’s 4th largest insurance centre by 2025? Possibly a pipe dream, but as we saw in the film “Field of Dreams,” “If you build it they will come”!