One of Barbados’ international business pioneers is warning of a new and likely harmful trend for the sector here.
Senator Dr. Trevor A. Carmichael, QC, whose Chancery Chambers law firm has for years been engaged in legal services related to international business, environmental, and charity law, said a subtle shift in reinsurance transactions should not escape the attention of practitioners and authorities here.
A major factor causing the shift specifically in Canada was increased scrutiny of certain transactions by regulators, he noted, all factors which were making the industry more an onshore one, rather than offshore, a fact which would be a negative for domiciles like Barbados.
Carmichael added that other factors causing the shift included travel cost savings, the insurability of certain areas of coverage, new onshore jurisdictions and potential premium tax savings.
The official said Barbados as an international business and finance centre “must always be mindful of developments within the wider global business environment, irrespective of how subtle may be the developments or changes”.
“With a reinsurance industry which has emerged out of the post- 1983 local exempt insurance developments, it is critical to constantly review global reinsurance trends,” he said in a new analysis on the issue.
“With Canada as one of the key partners, notice should therefore be taken of the current scrutiny in that jurisdiction of reinsurance transactions,” he urged.
Carmichael said an increasing number of companies in the reinsurance industry were now opting to registered their businesses at home in places like Canada, the United States and Europe because it was growing more economically and procedurally efficient to do so.
“Companies conducting reinsurance transactions are required to be audit ready by preparing contemporaneous documentation. However, as reinsurance is not a functionally intensive business, an auditor may sometimes conclude that there is a lack of substance in an offshore reinsurer,” Carmichael stated.
“Many offshore reinsurers are economical in their number of employees and will rely on third-party services companies for many of the reinsurance back office related functions. Such reinsurers must have more than administrative activities so that profits in excess of compensation for administrative functions may be attributed.
“Indeed, the reinsurer should be responsible for making risk assumption decisions based on relevant information. With these recurring issues, it is not surprising that many new captive owners are choosing onshore domiciles in the United States and the European Union,” he noted.
As far as Canada was concerned, Carmichael noted that the Canada Revenue Agency was increasingly auditing primary insurers, reinsurers, captives and brokers on the transfer pricing of their reinsurance premiums.
“Auditors will often retrospectively evaluate whether premiums are at arm’s-length. Premiums, however, are priced based on the information available at the time of entering into a reinsurance transaction; therefore assumptions are made on elements such as mortality and interest rates,” he explained.
“Increasingly, there is an emerging view that it is not appropriate for auditors to use hindsight to adjust the price of a premium based solely on factors evident at the time of an audit. For it is recognised that the pricing of reinsurance premiums is fundamentally based on the probability of the customers defaulting on their payments to the company.”
To illustrate the seriousness of the issue, Carmichael pointed to a recent study which showed that 55 per cent of companies had onshore captives, as opposed to 45 per cent domiciled in offshore locations by the end of last year. (SC)