Substance debate can enhance captives market

30 October 2018

The EU-driven debate over substance in business activities could strengthen the captive insurance market, experts said at the Guernsey Insurance Forum in London.

The Base Erosion and Profit Shifting (BEPS) debate has seen jurisdictions take different approaches to how they view business substance. And although captives, particularly offshore captives, are seen by some to be controversial in this space, BEPS could actually be seen to help the sector, said Paul Owens, Managing Director of the Global Captive Practice of Willis Towers Watson.

“BEPS is driving what we should be doing,” he said. “Insurance companies should not be a brass plaque on the door with nothing behind it.

“Whether we call them captives, offshore insurance companies, they are real insurance companies and in most cases are set up not for tax purposes but for transfer pricing. There is a very good model out there, experts come together and provide those services.”

Guernsey lawyer Kate Storey, partner at Walkers, said: “This is an opportunity once again to demonstrate that this sector has, and always has had, substance.”

She added: “New substance requirements are not a big deal for Guernsey – we have always been a jurisdiction of substance in insurance. We’ve got 50 years of history in insurance management. Pretty much every international insurer uses an insurance manager in Guernsey, and we employ chartered insurers and the skills all there within the management in Guernsey.”

Guernsey, Europe’s number one captive jurisdiction, has more than 200 captive insurance companies among more than 850 insurance entities in its long-established sector, and claimed more than half of the market share of new European captives launched in 2017.

“New substance requirements are not a big deal for Guernsey – we have always been a jurisdiction of substance in insurance. We’ve got 50 years of history in insurance management. Pretty much every international insurer uses an insurance manager in Guernsey, and we employ chartered insurers and the skills all there within the management in Guernsey.”
Walkers (Guernsey) Partner Kate Storey

The panel agreed that the international authorities can take a negative view of captives, and there was a need for education in the sector, including of the tax authorities, a process which is ongoing.

“The old model of bricks and mortar substance and someone sitting on a chair in the captive jurisdiction is pretty antiquated,” said John English, Chief Executive Officer at Aon Captive & Insurance Management.

Mr Owens agreed. “Very few of our clients are insurance professionals. That team becomes embedded with the client – decisions are made in the appropriate place and the work done is for the benefit of the client, the industry and the location.”

Jenny Coletta, Insurance Tax Partner at EY, specialising in international tax and transfer pricing, said that the challenge for the industry was how to present the substance argument, particularly when there was no internationally-agreed definition of the term.

“We are seeing increased tax scrutiny and so having the right governance structure around operations is really important now. The whole focus of tax around substance is being able to demonstrate your behaviour in a commercially-rational manner. It’s about demonstrating the commercial reality of what is happening rather than demonstrating false window dressing.

“Tax should never stand in the way of commercial practice. It’s about reflecting what you are doing, where you are doing it, having that documented and recorded. It’s about documentation and governance.”

Mr English said that the substance debate was something of a “wake up call” for the sector, but Mr Owens added that being able to consistently demonstrate substance would leave the sector in a stronger position and ready to get on with business.

Guernsey Insurance Forum Panel: L-R Moderator Naga Munchetty, EY Insurance Tax Partner Jenny Coletta, Aon Captive & Insurance Management CEO John English, Walkers (Guernsey) Partner Kate Storey and Willis Towers Watson Global Captive Practice Managing Director Paul Owens.

The Guernsey Insurance Forum took place at the Banking Hall in Cornhill. Sponsors were Bedell Cristin, Marsh, Willis Towers Watson, Artex, Appleby, Ogier, Royal London, Sun Trust, Walkers and Zurich.