Business

Turks & Caicos Islands:

OFFSHORE INSURANCE BASTION
By Paul J. Dodsworth, FCCA, International Insurance Managers Ltd.

The Turks & Caicos Islands (TCI), “Isles of Perpetual June” are a British Overseas Dependent Territory with a sound and stable political history. The Islands embrace a ministerial system of government that affords a high level of internal self-government, based on the English style of “parliamentary democracy.”

Only five of the Islands and three of the Cays are inhabited and the present population is around 18,000. The seat of government is on Grand Turk, the historic capital of the Islands, which retains its “Old World” charm, whilst the largest and most populated island is Providenciales, which has successful and rapidly developing tourism and financial services industries.

Around the Islands is an almost continuous barrier of coral reefs, which provide an ideal environment for small boats, scuba divers and snorkellers alike. The coastline boasts around 200 miles of golden sand beaches, many of which are seldom sullied by human footprints.
The legal system is essentially based on English Common Law, supplemented by locally passed legislation and by laws enacted by the UK Parliament that have been extended to TCI.

The US Dollar is the accepted legal tender. English is the spoken language and the Islands enjoy excellent communications facilities permitting easy access to all major financial markets.

There are no taxes on income, profits or capital gains, and there are no exchange control restrictions, enabling complete freedom of mobility of capital and currency into and out of the Islands.

TCI remains one of the most competitive and economic offshore jurisdictions worldwide. The level of both professional and government fees is extremely attractive.

OFFSHORE FINANCIAL SERVICES
In the midst of fierce competition among established offshore jurisdictions, TCI has over the years been able to achieve noticeably sustainable growth in all areas of its offshore financial services sector. Whilst it seeks to comply with internationally accepted standards, the TCI Government has introduced innovative and practical legislation to enable sound businesses to flourish without unnecessary administrative or regulatory burdens. This has resulted in the introduction of a continuously evolving package of legislation, tailored to meet the needs of international businessmen, offshore institutions and practitioners who not only wish to organize their affairs in a jurisdiction that enjoys a relatively premiere reputation, but also one that ranks among the most respected, well regulated, yet user friendly jurisdictions to be found.

Three key components of the offshore financial services industry are the Islands’ Companies, Insurance and Confidential Relations Ordinances. The first two, by and large, account for the degree of success that the Islands have been able to enjoy over the relatively short term.

TCI COMPANIES
All prospective TCI insurance companies must apply for the incorporation of a TCI exempted company at the same time as they apply for an insurance licence.

The formation and administration of Companies in the Turks & Caicos Islands are governed by the Companies Ordinance which has been and is continuously updated and amended to maintain its competitive edge and to keep pace with global changes. A significant advantage of the Turks & Caicos Company is the speed in which it may be incorporated and be ready to commence business. The Companies Registry is fully computerized and as a result, proposed corporate names may be approved immediately and reserved for up to three months.

Because of its simplistic but relatively sophisticated nature and its extraordinary flexibility, the Exempted Company or International Business Company (IBC) is widely used in the structuring of many legitimate planning strategies worldwide. An Exempted Company has no obligation to disclose any information relating to its directors, officers or shareholders to any authority. It may issue shares with or without par value, fractional shares, and may purchase, redeem or otherwise deal in its own shares. An Exempted Company also automatically receives an exemption from the imposition of future taxes for 20 years from its date of incorporation.

INSURANCE LEGISLATION
Formal insurance legislation in the form of the Insurance Ordinance 1989 and attendant Regulations was introduced in 1990. Since then, all TCI companies wishing to engage in any type of insurance activity require a formal licence to conduct insurance business. The establishment of the Financial Services Commission (FSC) in 1989 and the appointment of the first Superintendent as its head marked the beginning of the regulated era.

Since the introduction of the legislation, some 2,500 TCI offshore insurance companies have been licensed. This can only be described as a tremendous success story and is due to the foresight of the TCI Government in heeding the representations and advice of certain practitioners in the industry as well as certain external users of the jurisdiction. Particular attention was paid to the needs of the industry and a special feature of flexibility was introduced within the legislation. The flexibility is exercised on a case by case basis in the assessment of each application. It is for this reason that a detailed business plan (see below) is such an important part of the licence application.

One unique feature of the legislation is Section 7(11) of the Insurance Ordinance. This provides that where a TCI reinsurance company provides reinsurance only to a licensed or admitted carrier which is properly regulated in its country of domicile, then significant exemptions may be available from many of the normal regulatory and compliance requirements. The logic behind this treatment is that no useful purpose would be served by a second layer of compliance regulation, over a series of transactions which are de facto already regulated under the satisfactory regulatory system of another jurisdiction, without any increased risk to third parties.
There are a number of different types of insurance and reinsurance companies that are regularly established in TCI because of the flexibility of the legislation.

TYPES OF INSURANCE COMPANIES

1. Producer Owned Reinsurance Company [PORC, a.k.a. Section 7(11) Company]

A PORC is a reinsurance company which reinsures only the specific risk of an insurance company (the primary writer) that is admitted and regulated in another reputable jurisdiction. The PORC provides an excellent example of TCI’s flexible approach to insurance regulation that has been well received by users of the jurisdiction, so much so that TCI has become one of the world’s leading insurance domiciles.

Historically, the producer of the insurance business would enter into an arrangement with an insurance carrier and, therefore, enjoy the benefit of receiving a commission from the insurer. This relationship between the producer and the insurer was developed in the 1960s and early 1970s with the producer receiving a share of the profits of the program of insurance they generated. In the 1970s, insurers began offering reinsurance programs to large producers using US-based PORCs for life and disability reinsurance programs, but these PORCs needed substantial capitalisation and were heavily regulated.

In the late 1970s and 1980s, offshore PORCs began to appear in Cayman and Bermuda and soon became popular because they were more flexible in terms of the coverage they could write and because the levels of capitalisation were lower, thus allowing more modestly sized producers to establish a PORC. During the 1980s, TCI became the favoured jurisdiction for PORCs because of its flexible legislation, which provided for lower levels of capitalisation, a reasonable regulatory environment and the ability to reinsure risks other than life and disability. TCI’s Insurance Legislation introduced in 1990 and described above was specifically designed to be flexible enough to facilitate the continuing success of PORCs in TCI.

Nowadays, in addition to the insurance commission, the producer may also be able to participate in the underwriting profit of the insurance business he generates through the establishment of a TCI reinsurance company, which accepts a certain percentage of the insurance risk of the primary writing company under a Reinsurance Agreement.
The US primary writer is required, under applicable insurance regulations in the US, to take custody of a quantum of assets of the TCI Insurance Company, under the terms of a Custodial Agreement. The transaction between the insured and the primary writer is fully regulated outside TCI and all reinsurance premiums are withheld by the primary writer until the risk has expired and the premiums have become fully earned. At any time before expiration of the risk period, any claim received must be paid by the primary writer.

As consequence, the authorities in TCI took the view that no useful purpose would be served by imposing an additional layer of regulation in circumstances where it would result in a duplication of regulatory overview. TCI’s flexible approach to insurance regulation has been well received by users of the jurisdiction and has resulted in the significant number of insurance companies currently licensed in TCI.

Two examples of the practical use of a PORC are Credit Life Reinsurance Companies and Mortgage Guaranty Insurance Companies, which have contributed to the significant growth of the insurance sector in the Islands’ offshore financial services industry.

2. Credit Life Reinsurance Company
A credit life reinsurance company is a specific type of PORC that reinsures life and disability insurance. The initial insurance is issued by a life insurance company on the lives of borrowers to cover the payment of loans (usually small loans repayable in installments) in the case of death or disability.

Typically, credit life reinsurance companies provide life and disability coverage on automobile loans. Credit life reinsurance companies are usually owned by the automotive dealer in order to allow the dealer to earn underwriting profits and investment income on the cash flow from the business the dealer generates.

3. Mortgage Guaranty Insurance
A mortgage guaranty insurance is effectively an extension of the credit life reinsurance concept for automobile dealers, with a similar type of coverage (life/disability etc.) but with the loan covered being in respect of a property rather than a motor vehicle and the loan generally being correspondingly larger. These companies are regulated as standard PORCs with the same exemptions from some of the more onerous regulatory requirements.

CAPTIVE INSURANCE COMPANIES
A captive insurance company is an insurance company that insures the restricted risk, or sets of risks, of an owner who is not engaged primarily in the business of insurance.

A captive insurance company can be a useful risk management and financial planning tool. Captives can be used to provide cover for specialised risks or to add additional layers of cover not available through traditional commercial insurance markets. Other advantages enjoyed by captives are that they permit companies with good loss ratio histories to participate in their own underwriting profits and to assist in financial planning and cash flow management by allowing the company a degree of flexibility in setting its own premium levels.
As a captive insures only one risk, or a restricted set of associated risks, it is considered to be less exposed than a company writing third party policies. The TCI legislation was drafted with the intention that there should not be any onerous or unnecessary regulatory burdens on captive companies.

A captive insurance company, which may be more exposed during its first years of operation, may obtain reinsurance through traditional markets–allowing a capital base to be built up whilst minimising the risk to the company.

GENERAL INSURANCE COMPANIES
A general insurance company is an insurance company that is licensed to write general coverage to third parties.

General insurance companies form a very small part of TCI’s insurance industry, but can be formed to write general insurance business to third parties. Because of their nature, they assume a far greater level of risk and they are, therefore, more heavily capitalised and regulated than other types of insurance and reinsurance companies formed in TCI.

While broad insurance guidelines exist, as discussed, compliance is tailor-made to the individual circumstances. Thus, where general business with third parties is being conducted, a heavier degree of regulation and compliance should be expected. Where captive or reinsurance business under section 7(11) is concerned, compliance will be set according to the circumstances.

THE INSURANCE LICENCE APPLICATION AND THE BUSINESS PLAN
The business plan is the document upon which the Superintendent of Insurance will determine various compliance aspects of the proposed insurance company. It will contain important details such as the type of business and lines of coverage contemplated, anticipated levels and source of premiums, levels of reinsurance, projected claims experience, and other relevant information. The plan will also include five-year financial projections, disclosing the projected income and capital base at the end of each of the five years.

Based upon this information, the Superintendent will determine the adequacy of the proposed capitalisation, desirability of reinsurance, if any and at what levels, and other compliance aspects as considered appropriate. The case by case examination enables the Superintendent to set requirements that are appropriate to the particular circumstances of the application as opposed to fixed requirements covering all applications. This procedure ensures that unnecessary requirements and administrative burdens which serve no useful purpose are dispensed with. As unnecessary and onerous compliance requirements translate into administration costs, a significant cost saving is an added benefit of the system. Flexibility is one of the key reasons why so many legitimate insurance companies have decided to make TCI their domicile of choice.

In addition to the business plan, a host of additional information is required to be submitted in the application. This includes the names of the owners and directors of the company, together with details of their insurance and other experience. References are also required in respect of owners, directors, and other key personnel. Descriptions of the management, operational, and claims handling processes are also required. In cases considered appropriate, the Superintendent will recommend the appointment of a licensed insurance manager to assist in the overall management structure.

It is important to note that it is essential to obtain specialist advice in your own domestic jurisdiction before licensing an offshore insurance company.

PROFESSIONALISM
Whilst good legislation and regulation is essential to the success of an insurance domicile, so is the presence of suitably able and qualified professionals. There are a number of licensed insurance management firms as well as qualified auditors within the Islands. The insurance managers manage between them a very significant number of all TCI licensed insurance companies.

The licensed insurance managers within the Islands have a strong professional body, the Association of Insurance Managers in TCI (AIM), whose main function is to continuously monitor and further the interests of the insurance industry in the jurisdiction. Regular meetings are held to discuss changing industry needs and to maintain an open dialogue with the Superintendent of Insurance and the Financial Services Commission (FSC). Happily in TCI, the FSC and Government are receptive to recommendations and suggestions made by AIM. This working partnership is essential to chartering the continuous evolution of the industry and its changing needs.

SPEED AND EFFICIENCY
As a matter of practicality, once a completed licence application is submitted, one should allow up to 30 days for the approval process. However, for applications under Section 7 (11), i.e. PORCs and other instances such as captive situations, the approval process may be completed more quickly, assuming all the necessary paperwork can be submitted with the application.

The main concern of the FSC, TCI Government, and industry professionals is to try to ensure that only persons of sound repute are involved with TCI insurance companies. The vetting procedures of principals, etc. has assisted greatly in achieving a failure rate of less than 1% of all licensed TCI companies. TCI is only interested in good quality insurance business with persons whose good standing can be verified.

CAPITALISATION REQUIREMENTS
The capital requirements for insurance companies are also reasonable and flexible. Whilst statutory minimums are set down for General (US$100,000) and Life (US$180,000) companies, the capital level for insurance companies is determined according to the size of the company, kind of business to be written, anticipated loss and expense ratios, and other relevant criteria. In this scenario, PORCs, captives, and other reinsurance companies can be licensed with lower capitalisation levels. Each case is viewed on its own merits and circumstances.

CONFIDENTIAL RELATIONS
Strict confidential relationship laws, ensuring complete privacy in all business relationships, prohibit the disclosure of information without prior consent, except in compliance with a court order. Although TCI has strictly enforced confidentiality laws, the purpose is not to enable illegal criminal activities to flourish unabated. The Turks & Caicos are, therefore, a participating country under the Mutual Legal Assistance Treaty between the British and US Governments. The terms of this treaty give the TCI Supreme Court full power to pierce the veil of confidentiality to combat narcotics trafficking, money laundering, and major fraud.

This arrangement only serves to consolidate TCI’s premiere reputation as a reputable jurisdiction with which to do business whilst retaining the bastions of security that are fundamental to the success of any offshore jurisdiction.

CONCLUSION
The rate of new licensed insurance companies continues at a steady pace with interest arising from all over the globe, including the major financial centres. TCI is a well-regulated and respected offshore insurance domicile and the success story continues.
International Insurance Managers Limited are specialists in the formation and management of offshore insurance companies, serving general and specific niche markets, including:

*Reinsurance Companies, including Producer Owned Reinsurance Companies, with limited annual reporting requirements and reduced regulation.
*Captive Insurance Companies.
*General Insurance Companies (Life and Non-Life).

For any further information please contact Paul Dodsworth (International Insurance Managers Limited) or Ervin Quelch (Morris Cottingham Corporate Services Limited) at 649-946-2504 or by e-mail at mcal-gdt@tciway.tc or mcal-pls@tciway.tc.

The Morris Cottingham Group of Companies is a multi-discipline group of offshore financial services companies providing advice and professional services in all aspects of offshore financial services including company formation and management, insurance company formation and management, accounting and auditing, corporate recovery, trusts, financial planning and business consultancy.

Whilst every effort has been taken to ensure the accuracy and validity of the information in this article, we do not accept any responsibility for any errors, omissions or misstatements. It is important that any person wishing to incorporate an offshore insurance company take appropriate advice in his or her own jurisdiction.



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