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Alberta captive legislation presents new risk transfer opportunities for Canadian companies

In the current risk landscape, Canadian companies encounter an abundance of opportunities and challenges.

In the current risk landscape, Canadian companies encounter an abundance of opportunities and challenges. Although commercial insurance offers solutions to manage some of these risks, companies may also choose to self-insure part, or all of their risks.

One self-risk financing option available for Canadian companies is captive insurance. A captive can help protect a company’s balance sheet while maintaining flexibility in program design and providing potential savings.

Since July 1, 2022, Canadian companies have been able to form captive insurance companies domiciled in Alberta, giving them a second Canadian onshore option to access alternative risk solutions that lower insurance costs and enhance coverage.

How captives bring value

Captive insurance is a risk-financing mechanism in which a company insures itself against future losses. It is considered an alternative risk vehicle as it is a form of self-insurance. Instead of buying commercial insurance in the marketplace, an organization decides to retain some of its risk in its own wholly-owned captive insurance company. By incorporating captives in their risk financing strategy, organizations will likely experience a variety of benefits. These may include saving premium dollars from the commercial marketplace relative to their current loss experience, creating flexibility with their overall insurance program placement, and allowing access to reinsurance markets to further increase overall insurance capacity.

Businesses that create captive insurance programs have the ability to fund traditional coverages — such as general liability, workers’ compensation, auto liability, property insurance, and employee benefits — as well as difficult-to-insure exposures, including environmental and cyber risks.

Unlike commercial insurance premiums, captives are priced based on the company’s risk profile rather than as a reflection of what is happening in the industry globally. For example, due to natural catastrophe losses in other parts of the world, such as hurricanes in Florida, Canadian businesses’ property premium rates have frequently increased over the last several years. By setting up a captive, a company with a good risk profile, no significant losses, and robust safety and risk management programs in place can minimize its premium costs and reap financial rewards. In years without catastrophic losses, rather than creating a surplus that goes to the bottom line of a commercial insurance company, the organization instead can retain or reinvest the captive’s profits throughout the parent company.

The advantage of Alberta

Until July 1, 2022, British Columbia had been Canada’s only onshore captive regime. Canadian companies have also domiciled their captives in offshore regions, most frequently in Barbados, followed by Bermuda and the Cayman Islands. Especially for companies with purely Canadian operations, Alberta provides a new onshore option that can afford advantages over other jurisdictions — particularly offshore domiciles.

While offshore domiciles can provide greater economic benefits for non-Canadian risks due to tax treaties or tax information exchange agreements in place, it may be easier for a company to convince its board of directors and C-suite to set up a captive in a Canadian province. Board members may harbor a negative perception of creating an offshore company and feel that staying onshore optically looks a lot better for them. Additionally, remaining in Canada will likely simplify coordinating board meetings and travel.

For Canadian-controlled private corporations (CCPCs) interested in adding a captive to their insurance structure for Canadian risk, being able to domicile within Canada can be extremely highly beneficial. In late 2022, the Canadian federal government instituted tax changes that encompass insurance premiums paid to captives that are set up in offshore jurisdictions. These changes may result in an additional tax burden for Canadian risk insured in captives in these offshore jurisdictions. For instance, CCPCs using an offshore captive to handle their Canadian-only risk may be taxed at twice the rate of those who stay onshore.

Although British Columbia provides an alternative jurisdiction for businesses looking to domicile onshore, it may not prove to be a viable option. Companies will likely experience regulatory overburden and long licensing timeframes.

Conversely, Alberta is very motivated to be a true alternative to Barbados, Bermuda, and the Cayman Islands, viewing captives as a growth area and a priority. The regulator is responsive, and the licensing timeframes have been averaging only five weeks. As captive discussions often originate from renewal strategy meetings, organizations typically have time constraints for how long it can take to get their captive up and running. Now that companies are seeing that the Alberta regulator is consistently meeting a five-week deadline, they can feel confident they will be licensed by a specific date.

What the future may hold

Alberta will likely soon overtake British Columbia as Canada’s largest captive domicile. In its first 18 months of operation, Alberta has already licensed 17 captives, which is rare for any jurisdiction. For comparison, British Columbia’s captive legislation began in 1988 and has fewer than 25 captives.

In the short term, it is expected that Alberta will continue to license captives at a similar pace. Canadian companies are traditionally conservative when it comes to exploring alternative risk vehicles, hence why having an onshore domicile like Alberta is an exciting option. In the longer term, Alberta will likely get more creative and expand its legislation to include more insurance coverages. Currently, Alberta’s legislation does not allow for third-party risk, life insurance, and employee benefits, which forces Canadian companies interested in these types of captives to look offshore.

As Alberta licenses more captives, one of its biggest challenges will be balancing regulatory oversight and responsiveness. With a higher number of captives, will Alberta be able to continue consistently delivering the service and regulatory timeframes clients and brokers have come to expect?

Alberta will be subject to outside forces as well, such as the volatility of the commercial insurance and reinsurance markets. Even though these markets have been hard, if there are rate reductions and additional capacity in the future, this could directly impact how many organizations decide to create captives. With this in mind, another challenge will be maintaining the growth of new captives as the domicile matures and markets change.

Regardless of an organization's size or industry, a captive can be a powerful tool to take complete control of risk, while gaining greater financial flexibility and protection. For more information on how a captive can benefit your company, contact your Marsh representative.

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