The Captive Insurance Opportunity in Alberta: Drivers of Success in Captive Domiciles
DOI:
https://doi.org/10.55016/ojs/sppp.v17i1.79828Abstract
The annual economic impact from captive insurance companies in Alberta could range as high as C$139 million, but changes to the province’s current policies are necessary for the industry ideally to grow to 210 captives by 2033, up from the 20 licensed captives as of July 2024.
Alberta’s Captive Insurance Companies Act came into force in July 2022, making it the second province after British Columbia to permit captive insurance companies. Diversifying Alberta’s economy and building the province’s financial sector are important parts of the rationale behind Alberta’s captive insurance legislation, but much remains to be done.
To determine how Alberta can build on its early success, this paper extracts lessons from studies on captive insurance in Bermuda, Delaware, North and South Carolina, Vermont and Hawaii that measured captives’ economic benefits. Economic impact estimates per captive are as high as C$564,400 annually, demonstrating how a healthy captive market positively impacts a domicile. For example, in 2016, Delaware’s 1,081 captives generated US$360 million in economic activity, US$109 million in labour income and 2,573 jobs.
Alberta already has a sound foundation for success. The province’s speed of licensing means companies’ applications are approved within six weeks of being submitted. Alberta allows limited partnerships as a corporate structure for captives as well as the ability for companies to insure risks in other provinces. Being located in Alberta means time and cost savings for captives that can then avoid the expense of offshore travel for setup, board meetings and administration, aided by easy access to the regulator. Allowing for non-resident captive managers has proved attractive to companies from other domiciles, but fine-tuning these and other regulations is key if the industry is to flourish in Alberta.
For example, while four of Alberta’s 20 captives have established operations in the province, if Alberta were to require captive managers to be based in the province, this would generate a higher impact from employment and greater economic benefits.
To successfully compete with Barbados and Bermuda, Alberta needs to lower its minimum capital requirements for captives — $250,000 for pure captives and $500,000 for association and sophisticated insured captives. The Alberta government should also permit inter-company loans as an acceptable form of capital, as Bermuda and Barbados already do.
Alberta needs to expand its policy of not requiring collateral for reinsurance so that Alberta’s captives can access the Bermuda and Swiss reinsurance markets, which account for 27 per cent of the global property and casualty reinsurance industry.
Successful domiciles for captive insurance also allow for protected cell captives (PCC), which attract smaller entities because their operating costs can be up to 50 per cent lower than pure single-parent captives and the cells can be set up in days. The domiciles examined in this paper also have no insurance premium tax (IPT), engage with regulators and the industry via trade associations and hire experienced captive regulators — something it could take years for Alberta to achieve unless managers are recruited from elsewhere.
Alberta needs PCC legislation targeted at captive insurers, while examining the feasibility of creating an annual dollar IPT maximum and lowering IPT rates for captives. The province ought to also encourage the creation of an industry association whose members would engage with government on legislation and hire senior regulators to bring their expertise to the province.
By learning from the experiences of other domiciles and implementing their best practices, Alberta can quickly begin benefiting economically from the growth and vitality of the captive insurance industry.
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