DIFC positions for captive insurance

Captive insurance will be a new focus for the Dubai International Financial Center (DIFC) as it seeks new ways of handling risk in the current economic climate. "The DIFC has positioned itself as the principal domicile for the advice, consultation and implementation of insurance and captive solutions in the region," said Abdulla al Awar, the managing director of the DIFC Authority at a conference in Dubai [CK].

"Given the current global economic conditions, an increasing number of organisations are investigating the adoption of innovative solutions to enhance their overall insurance programme and risk management framework." Captive insurance is a risk management technique where a business forms its own insurance company subsidiary to finance its retained losses in a formal structure. The company covers its parent group's risks and sometimes the group's customers. The term "captive" comes from the fact that the policyholder owns the insurance company. Among the advantages of captive insurance is that cash flow is protected as reserves for unpaid claims and unearned premiums can be held by a captive and invested.

The DIFC aims to become a captive domicile, with a regulatory and legal framework of international standards, like Vermont in the US or Guernsey and Singapore. The financial free zone has an operational judicial system, the DIFC Court and arbitration centre, and a regulatory authority - the Dubai Financial Services Authority (DFSA) - that complies with global standards. Industry officials say there is tremendous growth potential for the captive insurance market in the GCC, as the asset boom in the region has created large and growing amounts of physical assets commanding large insurance premiums. Global economic volatility and investment losses may lead to higher insurance premiums, and therefore an increased demand for captive insurance, say analysts.

"The DIFC has taken the first step towards igniting a captive insurance market in the region," said Ronny Vellekoop, the office head of Marsh Management Services in Dubai. "Despite economic challenges, the need is now greater than ever." Analysts say awareness of the benefits of captive insurance is very low, which will be one of the main challenges in promoting this risk management technique in the region.

"The GCC captive insurance industry will overcome its regional challenges when the benefits of captives are better understood by local companies, resulting in a move towards captive insurance, just as it has happened elsewhere," said Mr Vellekoop. He added that a better established local captive insurers' market would allow regional companies to retain more risk in the region. [e-mail]