Labuan Captive Insurance Set up Support
Bona Trust Corporation provide Captive Insurance License Acquisition Support Service.
Traditionally, many of ASEAN’s corporate groups are family-owned companies, and there are many cases where each group company is insured against the risks inherent in the group.
In recent years, an increasing number of corporate groups have established captives as a means of intensively understanding and managing risks within such corporate groups.
Nevertheless, Captive insurance is still in the development stage in the Asia-Pacific region. The reason is that many of the traditional captives are installed in the Caribbean and Europe, and the captive market in Asia is a new concept, so it is still not mature.
Malaysia’s Labuan Special Economic Zone is currently rapidly developing as a captive market and is expected to grow into a market that represents the Asia-Pacific region in the near future.
Optimise business and asset portfolio
In order to optimise the current business and asset portfolio, it is necessary to fully understand the current state of management. This is a very important issue for business owners.
|Main management issues||・ How can we reduce operating costs?|
|・ How can we increase the profit margin?|
The management issue that should be addressed with the most highest priority by the business owner should be the construction of a business system that can simultaneously realise “minimisation of costs” and “maximisation of profits”.
|◇ Normal business condition|
|Tax costs||Operating costs||Net income|
However, if you think carefully, you can see that there is a trade-off between “profit gained by cost reduction” and “effective tax rate”.
|◇ When operating costs are reduced to maximise profits|
|Tax costs||Operating costs||Net income|
Reducing operating costs will increase profit margins, resulting in a tax on the reduced costs.
Even if you try to reduce costs, there will be no remaining funds as tax costs if no measures are taken. As a result, surplus profits earned desperately by reducing the number of employees or outsourcing non-core departments are taken as taxes, so the effort spent on cost reduction is wasted.
|◇ When operating costs are increased to minimise tax costs|
|Tax costs||Operating costs||Net income|
On the other hand, if operating costs are increased in order to reduce tax costs, profit margins will decrease, resulting in lower taxes.
However, if the operating cost is increased, funds will not remain at hand. On the contrary, the break-even point goes up, so if sales fall due to changes in the external environment, etc., you may face a bankruptcy crisis.
In this way, you can see that if no measures are taken, the “profit rate” and “effective tax rate” are in a trade-off relationship.“Maximising profits realised by cost reduction” and “Minimising tax costs realised by cost reduction” are like both wheels of a bicycle, and it does not make sense to rotate only one of them.
One merit brings its demerit on the other.
Therefore, in view of the essence of portfolio optimisation performed by many business owners, we must say that we are taking measures that are extremely cost-effective.
Importance of tax planning
What is needed here is the idea of tax planning.
Tax planning (tax saving) is means strategically thinking about how to leave funds at hand from a long-term perspective.
If you are thinking of a portfolio based on the traditional framework of “minimising costs” and “maximising profits”, it is difficult to leave funds on your hand, so you need to consider tax planning at the same time.
In general, tax planning consists of 2 properties and can be classified into 4 types:-
|・ Tax saving method by using money||(1) How to reduce taxes using money|
|(2) How to postpone taxation timing using money|
|・ Tax saving by not using money||(3) How to reduce taxes without using money|
|(4) How to postpone taxation timing without using money|
Among the above 4 categories, the option of captive insurance (in-house insurance) is considered to fall under the method (1) above. By combining various structures, you can minimise costs and maximise profits, resulting in the optimisation of your portfolio.
* Setting up a captive requires some initial costs, including prior consultation with insurance companies, lawyers, and accountants, as well as consulting costs for specialists. Therefore, estimated captives are based on company group owners who generally spend more than USD 500,000-600,000 per year on minimum insurance expenditure.
What is captive ?
A captive is an insurance company that specialises in the risks of the group that is established within the group, where the original insured are the principal beneficiaries.
Captive insurance is normally established in an offshore jurisdiction because the onshore jurisdiction does not have the environment and regulations to establish and operate a similar service.
In many cases, insurers located in offshore jurisdictions are not legally allowed to directly take on risks in onshore jurisdictions. Therefore, it is common to conclude a reinsurance contract that is “insurer insurance” with an onshore insurance company and transfer the risk to captive.
How to use captive
To build a captive insurance structure, companies group owner must first select risks within your group companies.
For example, when there is a risk of product compensation, there is a risk of litigation from other companies in the same industry, it is necessary to set a premium as non-life insurance.
Insurance premiums are not invested 100% in the products of general insurance company, but rather establish new insurance companies in offshore jurisdictions.
By doing this, you will be able to manage your own fund that you would normally leave with a general insurance company. The profits earned from the insurance money can be managed under the tax system of the offshore jurisdiction.
[Traditional Insurance Structure]
[Captive Insurance Structure]
Types of Captive
The types of Captive are as follows:-
Types of Captive
|Pure / Single Captive||Pure Captive is an insurance subsidiary that provides insurance to cover the loss exposures of its parent company.|
Whilst no insurance risk is transferred out of the organisation, except through reinsurance arrangements designed to protect the captive, a pure captive allows a company to monitor its operational risks, review its loss exposures and to provide efficient claims management to it and its subsidiaries.
|Group Captive /Association Captive||Group Captive is a captive that is owned by a number of different parent companies who are normally from the same industry.|
Companies often elect to use a group captive when:
Group captives can have a potential drawback in that that profits can be impacted by the poor performance of any single party. Consequently, group captives often employ independent underwriting managers to accept and decline business.
|Multi owner captive||Multi owner captive is owned by two or more unrelated persons or organisations and writing the risks of its owner and/or affiliates and is designed to insure the risks of these different entities.|
|Master Rent-A-Captive||Master rent-a-captive is an arrangement whereby an existing captive’s capital base is accessed by a third party that wishes to form a captive but without the cost or time involved in having to incorporate a separate entity. Often renting a captive is a first step towards the formation of a single parent, group or association captive once experience has been established. Rent-a-captives usually earn fees based on the volume of income being ceded depending on the size of the volume.|
One of the key issues to a rent-a-captive owner or manager is to ensure that the capital base is not at risk from a poor loss ratio of any of its users. This can only be accomplished by ensuring that there is no financial risk to the rent-a-captive from any of its users. In order to achieve this, the captive owner is required to purchase reinsurance as well as to provide collateral to bridge the difference between the net premium to the captive and the point at which reinsurance stop-loss cover applies, commonly known as ‘the Gap’.
|Subsidiary Rent-A-Captive||Subsidiary rent-a-captive is an entity with separate licenses, assets and accounts but at the same time using the working capital of master captive.|
|Protected Cell Captive||Protected Cell Captives are similar to Rent-a-Captives except that the assets of each user are protected from one another by law. Each user is referred to as a ‘cell’ and the operation of each cell is controlled through a cell user’s agreement with the captive. As the supporting capital base of the Protected Cell Captives is still at risk, part of this operating agreement normally requires cell users to collateralise any risk gap (the amount between premiums and the point at which reinsurance attaches) to the captive.|
(Ref: [Protected Cell Company])
Why use Labuan ?
Recognising the financial advantages of being able to provide captive domiciles, over the years a number of governments have passed legislation to allow captives to be established in their jurisdictions. Smaller countries have the largest share of the captive market as they have the most flexibility in being able to legislate for captives and often are able to provide favorable tax climates.
Establishment of a Captive in Labuan provides a very attractive tax rate to the Company, whereby you just pay 3% of audited net profit. Captive provides greater flexibilities to customise the best policy coverage to a specific company.
Also, the city area of Labuan (Bandar Labuan) is very small, and trust companies and insurance companies are concentrated in the range of about 800 m × 1 km from Labuan FSA (Labuan Financial Park), so if something trouble occurs, the local staff will respond immediately. There are also physical benefits that can be achieved.
Labuan Captives can be structured in several different ways of which most frequent used structure is Single Parent Captive, which often described as ‘pure’ captives. These companies are under a single owner to whom they provide insurance coverage, usually managed by a domiciled captive insurance manager and monitor by risk manager or financial officer at the parent company.
|A. Labuan Captive Insurer|
|(a) Must have an operational management office in Labuan managed by a management team that has an adequate knowledge and expertise in insurance business including captive;|
(b) Must appoint a licensed Labuan underwriting manager.
At least 2 directors (preferably a natural person) with insurance or insurance related experience. There is no residency requirement
|B. Paid up capital / Working Fund Amount (RM)|
|Group Captive/Association Captive||300,000|
|Multi owner captive||300,000|
|Protected Cell Captive||500,000|
|C. Solvency Margin|
|(a) A Labuan Captive Insurer is required to maintain at all times a surplus of assets over liabilities, which is equivalent to, or more than the amount of its working fund.|
(b) 20% of the net premium income for the preceding year in respect of the general insurance business, or 3% of the actuarial valuation of the liabilities for life insurance business as at the last valuation date,
|Real activity requirements|
|(a) The Captive must employ at least 4 full-time staff in Labuan as a minimum employment requirement.|
(b) The Captive must spend at least RM100,000 on Labuan as the minimum annual expenditure (RM)
* If the above requirements are not met, the mainland Malaysia corporate tax (24%) will be applied as the effective tax rate (from January 2019)
(Ref: [Labuan Business Activity Tax])
Labuan Special Economic Zone in Malaysia has revised some of the domestic laws to meet the requirements of the 2018 OECD BEPS Action Project and has started operations in accordance with international standards.
As a result, it is possible to achieve highly transparent captive operations by meeting real activity requirements.
Labuan has no time difference with the Asian region (only 1 hour time difference with Japan, Korea), is in an environment where operations are extremely easy to implement, and construction of a structure that meets the activity requirements at low labor costs is realised at low cost you can do it.
It can be said there is much value to consider Labuan for the realisation of captive operation.
Should you have any queries, please do not hesitate to contact us.