Latin American captives grow despite challenges

ORLANDO, Florida – The number of captives formed by Latin American companies has doubled over the past decade as owners overcome various political and economic hurdles, a panel of experts said.

Governments in the region remain wary of programs that might lessen tax revenue, and many companies are not big enough to see the benefits of establishing a captive. Still, organizations in sectors such as construction and retail are using cell captives or single-parent captives to cover some of their exposures, panelists said Thursday during a session of the World Captive Forum, sponsored by Business Insurance.

In 2015, there were an estimated 80 to 100 captives owned by Latin American parents, compared with 200 to 220 today, said Eduardo Fox, consultant-private client and trusts and Latin America at law firm Appleby in Bermuda.

Bermuda houses about a third of all Latin American captives, he said.

Government authorities in Latin America, though, can be wary of captives, said Javier Ordoñez Namihira, a partner at Baker & McKenzie Abogados SC in Mexico City.

“Our governments in Latin America are eager to increase their tax collections, to increase their budgets for their social programs,” he said.

Several Latin American countries have “anti-deferral” rules that impede companies from moving profits or premiums to offshore entities, Mr. Ordoñez Namihira said.

Regulators also want to ensure that there is substance to the captives, such as assets and staff, and that they transfer risks and have legitimate economic reasons for being used, he said.

“All units, not just the CEO-level, should be able to understand how it works and explain it to tax authorities,” Mr. Ordoñez Namihira said.

Captives are well-known in Latin America, but there are challenges to using them, said Carolina Zalamea Lechtman, CEO consulting at Gallagher Colombia, a unit of Arthur J. Gallagher & Co.

For example, captives in Latin America are smaller than in the United States and manage only $1 million to $5 million in annual premium, she said.

“These figures are significant for our countries but bring important challenges in terms of cost and efficiency,” Ms. Zalamea Lechtman said.

As a result, Latin American companies often form segregated account companies rather than single-parent captives, she said.

In addition, it can be difficult to find local companies that offer fronting services to captives, Ms. Zalamea Lechtman said.

Nevertheless, there is interest in forming captives, particularly in sectors such as construction, retail, health care, financial services and transportation, she said.