Gibraltar: Captive Insurance

Gibraltar is situated at the Southern most tip of the Iberian Peninsula, covering an area of 2.75 square miles, joined to the Spanish mainland by a narrow isthmus upon which its international airport is built. Africa at its closest point is 9 miles away in the form of the Spanish territory of Ceuta. The Moroccan City of Tangier is 32 miles away at the western end of the Straits of Gibraltar which connect the Mediterranean and the Atlantic Ocean.

Gibraltar is a member of the European Union unlike Jersey, Guernsey and the Isle of Man which only have associated status. It is a dependant territory of the United Kingdom and has full access to the Single Market by virtue if the United Kingdom's membership under Article 227 (4) of the Treaty of Rome and the UK Act of Accession.

The conduct of insurance business in Gibraltar is regulated by the Insurance Companies Ordinance 1987 and its subsidiary legislation.

Insurance business is licensed and controlled by the Commissioner of Insurance who is charged with the administration of the Ordinance and its Regulations. The Ordinance lays down a basic framework for the setting up of Gibraltar insurance companies, both third party insurers and captive insurance companies. It also provides for the licensing of foreign insurance companies wishing to carry on business in Gibraltar.

Since the implementation of the 2nd and 3rd EU Directives Gibraltar Insurance companies are able to write direct business into the EU without the problems of establishing an insurance presence in each of the individual territories where the risks are to be written.

A captive may be defined as a limited purpose insurance company established with the specific objective of financing risks emanating from its parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers.

The types of risk that a captive can underwrite for the parent include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captives exposure to such risks may be limited by the use of reinsurance.

Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:

• heavy and increasing premium costs in almost every line of coverage;
• difficulties in insuring certain types of fortuitous risk;
• differential coverage standards in various parts of the world;
• rating structures which reflect market trends rather than individual loss experience;
• insufficient credit for deductibles and/or loss control efforts.

The main reason major corporations may look towards forming Captive Insurance companies is that the conventional insurance industry does not meet their financial needs in terms of price, cover, service and capacity.

Possibly the most commonly accepted advantage of forming a captive insurance company is the ability to gain access to the reinsurance market. Unlike in the direct insurance market, reinsurers are able to operate on comparatively low expense ratios. For this reason the captive can obtain better value for money in return for the premium it pays than the company buying a policy direct from the insurance market.

Gibraltar Captives, like those established in Dublin, are able to underwrite business on a direct basis within the EU. Not all captives established in the community are able to do this. In particular, it is only possible to form reinsurance captives in Luxembourg which cannot take on business directly. An increasingly important consideration to domiciling in Gibraltar is that Gibraltar is not within the V.A.T. zone and therefore is also V.A.T. free.

In addition Gibraltar has the advantage of two possible methods of taxation. The company may be exempt from taxation in which case it pays an annual fee of £225. Alternatively as a qualifying company it will be assessed and pay taxation between 2% and 35%, thus satisfying any of the fiscal requirements the parent company may have on account of its domicile.

A number of other reasons major corporations opt for the captive route include:

• lower cost of insurance;
• improved cash flow;
• stabilisation of costs;
• high rate of return on capital
• formalisation of loss reserves;
• focuses decision-making on cover and risk control;
• flexibility in design of risk financing programme;
• benefit of improved loss experience;
• diversification into financial services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.