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Substance debate will strengthen captive insurance market: Analysts

31st October 2018 - Author: Matt Sheehan

The Base Erosion and Profit Shifting (BEPS) debate regarding substance in business activities will act as a “wake up call” for the captive insurance market, but will ultimately strengthen the sector, according to industry analysts.

guernsey-finance-logoSpeaking at the Guernsey Insurance Forum in London, Paul Owens, Managing Director of the Global Captive Practice of Willis Towers Watson, said that BEPS will enhance the perception of captives, which are often viewed as controversial.

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

“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,” Owens continued. “There is a very good model out there, experts come together and provide those services.”

He maintained. that being able to consistently demonstrate substance would leave the sector in a stronger position and “ready to get on with business.”

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With more than 200 captive insurance companies, Guernsey is Europe’s leading captive jurisdiction and claimed more than half of the market share of new European captives launched in 2017.

Panellists at the Forum agreed that the substance debate would help to promote education regarding the sector and alleviate the negative view of captives taken by international authorities.

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

“New substance requirements are not a big deal for Guernsey – we have always been a jurisdiction of substance in insurance,” she added. “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.”

John English, Chief Executive Officer (CEO) at Aon Captive & Insurance Management, also stated: “The old model of bricks and mortar substance and someone sitting on a chair in the captive jurisdiction is pretty antiquated,” adding that the debate would be a “wake up call” for the sector.

Jenny Coletta, Insurance Tax Partner at EY, suggested that the challenge for the industry would be how to present the substance argument, given that there is currently no international-agreed definition of the term.

“We are seeing increased tax scrutiny and so having the right governance structure around operations is really important now,” she said. “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.”

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