Labuan Captive Insurer…… from reinsurance captive to fronting insurer?


Pardon my ignorance! But seriously…. very few practitioners actually knew about a major change having made to the section 140(1) of  Malaysian Insurance Act 1996 back in March 2009.

Let’s revisit relevant subsections of section 140 of the Insurance Act prior to 31st March 2009:

Section 140 Insurance Act 1996 – Insurance of property and liability
(1) Except with the prior written approval of the Bank, no person shall insure or cause to be insured property, or liability, with an insurer other than a licensed general insurer. 

(Penalty: Five hundred thousand ringgit.)

section 140(5) – further define:  (a) “property” means property, movable or immovable, located in Malaysia, including any ship or aircraft registered in Malaysia;  (b) “liability” means liability of a person resident in Malaysia to a third party.

Section 140(5) of the Insurance Act is very clear – thus dictated as to how captive insurers can operate……

How a CAPTIVE works prior to 31st March, 2009….
Original Insured Fronting Insurer Captive Reinsurer retrocession (Re)insurer(s)

where the original Insured seek a fronting insurer (licensed under the Insurance Act) in a manner as required in section 140 of the Act. The fronting Insurer will then offload the prior agreed percentage of the original risk to the prescribed Captive Reinsurer. The Captive will rearrange the terms and conditions of cover (inclusive of tweaking the original rates) and retrocedes out to targeted (re)insurers, which may also includes those insurers licensed under the Insurance Act.

The position after 31 March 2009:

How a Captive works after 3st March 2009….
Original Insured Captive Insurer (Re)insurer(s)

This time around…. there is no necessity to have a Fronting Insurer, just park the risk with a Captive Insurer registered under the Offshore Insurance Act 1990. Simply says, “From Captive reinsurer to a Captive Insurer” bearing in mind their license involved writing both categories. Please click on the document file:

Insurance Exemption Order 2009

Under the March 31st, 2009 Insurance (Exemption) Order 2009, there were numerous exemption orders, but the relevant one relates to section 4(1). The new position can be summarised as follow:

Exemption Order from subsection 140(1) of Insurance Act 1996

Section 4 (1) of the Insurance (Exemption) Order allows a company to insure any risk relating to: 

(i)   international maritime shipping,

(ii)  international commercial aviation and any liability deriving from such risk, and

(iii) risk relating to goods in international transit.

with an offshore insurer (which in such cases are relating to Captive Insurer registered under the Offshore Insurance Act 1990) licensed to carry out such classes of general insurance business.

It did not stop here….. the Order also allows insuring of those prescribed categories of risks with any registered (or licensed) insurer of a Member State of the ASEAN that is a signatory to the prescribed Protocol….. dated 4 April 2008.

The company which is pursuing this line of insuring of their risks must appoint a licensed insurance broker (Insurance Act 1996) to provide the necessary advices before proceed with the insurance plans.

So the story goes…. as it was widely reported:

The News about AirAsia Corporate Services Ltd being a Labuan Captive Insurer

Malaysia’s low-cost airline, AirAsia Corporate Services Ltd (AACSL), has been cleared to set up a Labuan captive insurance business with approval from the Labuan Financial Services Authority, the regulator of Malaysia’s offshore financial center. The Labuan captive business will provide access to the commercial insurance market and to enhance flexibility in managing and retaining the company’s own risks, said AirAsia in a statement.

With the approval, AACSL, a subsidiary of AirAsia, will be able to insure and reinsure many of the risks within the group. An airline spokesperson declined to comment on the company’s existing insurance program and its future alignment with the new captive unit.

The Labuan captive unit will directly insure AirAsia’s international aviation, maritime and liability risks. AirAsia will pay its insurance premiums to the captive unit instead of paying through local (fronting) insurers.

With the setup of its own captive business, AirAsia said it will have a choice of which risks and how much risk the company intends to retain within the group, thus giving greater flexibility in managing its risks.

The Labuan captive business will have inherent tax and investment advantages, and it offers AirAsia an opportunity to set up a profit center within the group. With enough funds, the captive business is expected to transfer some of its capital to AirAsia through the payment of dividends, according to the airline.

With 82 aircraft, AirAsia has operations in Malaysia, Indonesia and Thailand, servicing 18 countries across Asia. Its total revenue rose 11% to 3.18 billion ringgit (US$992 million) in 2009. Profit after tax was 549 million ringgit, up from a loss of 497 million ringgit a year earlier, according to AirAsia’s financial statement.

Labuan International Business and Financial Center, an offshore financial hub of Malaysia, had 32 captives in 2008. The center’s major captive business lines were oil and gas with US$69.9 million in gross premiums, accounting for 55% of total gross premiums in 2007.

Marine and fire were the next largest captive business lines, with gross premiums of US$14.5 million and US$11.9 million, respectively, in 2007.

Labuan IBFC was set up in 1990 as Malaysia’s official offshore financial center for financial services such as insurance, captives, banking and asset management.

The offshore center harbors particular expertise in marine and cargo, aircraft, petrochemical, mining and professional liability coverages. The domicile generated premiums on more than US$127 million in 2007, according to Labuan IBFC.

In conclusion…. the industry was sort of caught unaware of such a change simply because this was never reported by PIAM, it was nevertheless found in the Bank Negara’s kijang-portal, which not many would have such access priviledges. But by such changes, there would be another level of competition brewing somewhere in the horizon! Are you prepared?

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11 comments for “Labuan Captive Insurer…… from reinsurance captive to fronting insurer?

  1. ganesh
    August 16, 2010 at 15:33

    Guess this things always happened. Authorities come out with new laws but the practioners are not too aware what are these for!

  2. Ray
    June 4, 2010 at 09:44

    Hi, Pro! My friend who is an expert with this Labuan’s stuff said this is NOT true, as Captives are not insurer. The exemption order could be talking about those Labuan offshore registered insurers, but he is not sure which company is registered under such category.

    • Housse
      June 4, 2010 at 09:50

      Is AirAsia going ahead with the AACSL placement for their fleet of planes? Their fleet was just renewed in May. But it is good to know.

      • June 5, 2010 at 10:59

        The last time someone told me was that AirAsia renewed their fleet of aircrafts fronted by Etiqa again! THis was in May and therefore in contrary to what was reported in the press…. Perhaps there were lot more complicated issues in addition to those compliance matters.

        • Kilpman
          June 22, 2010 at 09:00

          There are differences between Broker, Captive, Insurer and Reinsurer for Labuan Offshore registered companies.

          For Captive, there are Pure captive, rent-a-captive and also recently there is this protected cell captive (or PCC). These Captives are also divided into Life and General. This also means Captives are actually (re)insurer but only thing they can only cater for the risks of their parent and group companies. So they should have no problem fronting those risks as a Labuan insurer.

    • June 5, 2010 at 11:01

      Has to be true….

    • March 1, 2013 at 17:14

      My understanding is that a Labuan insurer can carry on Labuan captive insurance business. The principal difference between a Labuan insurer and a Labuan captive insurer is the paid-up capital requirement: it is lower if only Labuan captive insurance business is to be carried on. The result, to my knowledge, is that if a Labuan insurer or captive insurer is an approved MAT insurer, whether approved by BNM or an ASEAN regulator, it can write, on a direct basis within ASEAN, “MAT insurance”, which is defined as “the insurance of risks relating to international maritime shipping, international commercial aviation and any liability deriving from such risks and risks relating to goods in international transit”. So, it would seem that, provided AACSL is an approved MAT insurer, it can insure the international component of the group’s risks.

  3. May 25, 2010 at 22:03

    international maritime shipping and cargo in transit internationally, meaning allowing vessels including cargo to be insured by other than local registered insurers? This means insurers from ASEAN countries and the many captives (including rent-a-captive) would be competing for such business.

    • May 28, 2010 at 18:37

      Guess… this is part of the AFTA related thing. Learning how to compete and at the same time not getting on the wrong side of solvency issue is the way forward.

  4. May 25, 2010 at 00:53

    [New Post] Labuan Captive Insurer…… from reinsurance captive to fronting insurer? – via @twitoaster

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