Just months after Hurricane Maria devastated Puerto Rico, dealing a blow to the island and its people, a recent article on Puerto Rico's insurance industry unceremoniously spreads misunderstanding.
A recent article in Forbes made some remarkable allegations against Puerto Rico, its insurance laws and regulators, and the risk management professionals who work for and with the domicile. The article does a grave disservice to Puerto Rico and the captive industry generally, and is especially unfortunate as the island recovers from the effects of Hurricane Maria. The allegations seek to damage a well-regulated domicile on an island already struggling with recovery of epic proportions. Familiarity with Puerto Rico and its robust insurance laws could have gone a long way in separating fact from fiction. Unfortunately, that's often easier said than done.
Let's get past the falsehoods in the article, largely a self-promoting pitch for consulting services and other "captive promotion" activities, and get to the truth behind what makes Puerto Rico a robust and well-regulated international and US-based domicile.
Puerto Rico FAQs
Claim: Puerto Rico is a venue for "offshore" promoters that create "fake insurance models."
Reality: Enterprise Risk Management captives are widely-accepted, main stream insurance structures that are entirely appropriate when created properly. Further, Puerto Rico is far from an "offshore" domicile. With a population of approximately 3.5 million, nearly all U.S. citizens, Puerto Rico is the larger U.S. territory by population. Like all U.S. States, its Department of Insurance is accredited by the NAIC, and its supervision of the captive insurance sector is one of the most robust regulatory climates of all domiciles. In addition, Puerto Rico captives are subject to nearly all US federal laws.
Claim: Puerto Rico Captives are Promoter Schemes Owned by Puerto Rican "locals" in Name Only
Reality: Puerto Rico international insurance regulations were created to allow non-locally owned insurance entities to offer international insurance from a NAIC accredited domicile. Under these regulations, the robust capital requirements needed in order to qualify as an international insurer are substantially higher than the amount required in most domestic mainland jurisdictions. Further, the Premium to Capital Ratio of 3:1, which must be maintained by all captive participants in a P&C Protected Cell Company, not just the core owners, is significantly more than most other domestic and foreign captive domicile require.
Claim: A "Segregated Cell" Captive is a "Bad Structure"
Reality: Segregated Assets Plans or Protected Cell Companies are now present in a large majority of domestic and foreign captive domiciles. As with every other captive structure, if done properly there is nothing inherently wrong or devious about such a formation, and they can often be more efficient than a traditional stand-alone structure.
Let's take a look at the history of cell structures. Domiciles round the world have enacted protected cell captive legislation. Guernsey was the first in 1997, followed by Bermuda and Cayman in 1998, and Vermont, Rhode Island, and Illinois in 1999. South Carolina and others have passed similar legislation. Puerto Rico has passed "Segregated Assets Plan" legislation under Chapter 61 of the Puerto Rico Insurance Laws for International Insurance companies, with higher capital requirements than some domestic mainland domiciles.
Claim: Puerto Rico's territorial status and its citizens are being employed as unwitting participants to set up spurious captive structures.
Reality: The Puerto Rican government, from the Governor and the highly-qualified and engaged staff of the Office of the Commissioner of Insurance, to the the Economic Development agencies, are well-versed in the details of captive insurance. From an industry participation perspective, risk management professionals have invested time and resources in Puerto Rico, as have major legal firms, top ranked actuarial firms, and accomplished CPA firms, all of whom work closely with the Puerto Rican regulators. The hardworking insurance professionals who drafted and police the insurance laws of Puerto Rico, and the US Citizens (all types) who travel to, live and work in Puerto Rico, all deserve industry respect.
Claim: Puerto Rico allows promoters to offer bogus captive programs with "absurdly high premiums, vague coverage wordings and low claim risk pools"
Reality: In light of the recent Avrahami tax case, it is very unlikely that any self-respecting captive manager would conceive of offering such a bizarre program, or if they did, that that any competent business owner or trusted advisor would contemplate taking part in such a program. In fact, it's a laughable assertion. The members of the Puerto Rico International Insurers Association are proud to operate under a robust regulatory regime, and encourage all interested parties to learn more about Puerto Rico and the advantages of working, living in or doing business with Puerto Rico.
Puerto Rico expects and welcomes prospective captive clients and advisors to do a thorough due diligence of the domicile. Uneducated and malicious claims do a grave disservice to Puerto Rico and the captive industry generally, and are especially unfortunate as the island recovers from the effects of Hurricane Maria. The Puerto Rico International Insurers Association is proud to operate under robust insurance laws, a strong regulatory presence and a transparent framework in place for captive owners, managers and participants alike.