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CAPTIVE INSURANCE CORPORATIONS INTRODUCTION Panama has been an important international financial centre for over sixty years. It has been known worldwide for its attractive fiscal legislation to execute offshore transactions, as well as for its banking system and convenient legislation on corporations, ship registration and trust. Just recently, the Legislature approved a new and innovative law on private foundations. Due to the demands by the international bussines community, Panama has adopted a new legislation on captive insurance companies by means of Law No., 60 of July 31, 1996 to complement the services provided by it’s financial centre, considering that captive insurance has become, second only to banking, one of the most important sectors of the offshore financial industry. CONCEPT Captive insurance companies are defined by Mr. Alwin M Tamosius in his article "Insurance, The enigma of offshore captives" as a corporate entity created and controlled by either a parent company, professional association or a group of businesss whose sole purpose is to provide insurance for that parent, association or group as an alternative to purchasing insurance from the conventional market These types of companies are called "offshore insurance companies". The decision to use a captive insurance company to provide insurance is the need to reduce costs and to achieve better risk management. This reduction of costs is obtained mainly from the tax benefits that are given by the legislation to offshore insurance or reinsurance. According to the legislation, captive insurance companies are companies, either Panamanian or foreign, authorized by the Superintendence of Insurance and Reinsurance of the Ministry of Commerce and Industry of Panama to insure or reinsure foreign risks from an office located in Panama. The authorization by the Superintendence of Insurance and Reinsurance is granted to insure either long term risks, which include individual, collective or group lives for hospitalization, pensions or permanent rent, or general risks, to insure or reinsure any other risks not considered as long term risks. Captive insurance companies can only insure or reinsure the risks approved by the Superintendence of Insurance and Reinsurance. They are not allowed to insure or reinsure local risks pertaining to individuals resident in Panama; real estate and personal property located in this country; vehicles, planes and vessels registered in Panama excluding those dedicated to international commerce; civil liabilities derived from damages and losses produced in Panama and the transportation of goods which destination is Panama. All other risks not mentioned herein are considered by the law as foreign or offshore risks. REQUIREMENTS FOR A CAPTIVE INSURANCE COMPANY The organization and operation of a captive insurance company is composed of two stages. INCORPORATION For a license to operate a captive insurance company from Panama, it is first necessary to request to the Superintendence of Insurance and Reinsurance authorization to organize a Panamanian company or to register a foreign company in Panama to act as captive insurance company. This request must be filed with the following documents and information: In the case of a Panamanian company, the draft of its articles of incorporation and in case of a foreign company, a certified copy of its articles of incorporation; a goodstanding certificate issued by the corresponding authorities; a resolution issued by the board of directors of the company authorizing the opening of an office in Panama, appointing the resident manager or attorney- in-fact, the Resident Agent and the amount of paid-up capital to carry out the captive insurance or reinsurance business, and its balance sheet. These documents must be legalized by the Panamanian Consul or Apostille. Banking and personal references of all shareholders and directors of the company. Address where the company will have its offices and name of resident manager or officer of the company, who can be an insurance management company authorized by the Superintendence of Insurance and Reinsurance to manage captive insurance companies. A Technical report, which must state type of risks to be insured or reinsured and insurances or reinsurances to be taken; reinsurance program, if so is the case. A Certified check for US $1,000.00 to the order of the Superintendence of Insurance and, Reinsurance to cover due diligence expenses of the Superintendence of Insurance and Reinsurance. All documents in foreign languages must be translated into Spanish and legalized by the Panamanian Consul or Apostille. Should the company dedicate itself to insure general risks, the captive insurance company must have and maintain a paid in capital of US $150,000.00 In case the company will dedicate to insure long term risks, the paid in capital must be of US $250,000.00 The stated capital must consist of assets free of encumbrances and kept at all time in Panama. Once the above indicated documents have been reviewed and approved by the Superintendence of Insurance and Reinsurance it will authorize the incorporation of the Panamanian company or the registration of the foreign company with the Public Registry. LICENSE After the requirements indicated above have been met, the application for the license to operate the captive insurance company must be filed with the Superintendence of Insurance and Reinsurance together with the following documents. A Certified copy of the articles of incorporation of the company as they were registered. An affidavit issued by the Public Registry certifying the registration of the company. Financial statements audited by Certified Public Accountants. In case of new companies that have not operated, then an initial balance sheet audited by Certified Public Accountants and legalized by the Panamanian Consul or Apostille. Captive insurance companies dedicated to insure long term risks, in addition to the above-indicated stated capital, must keep during its existence and operation a solvency margin of 6% on their mathematic reserves. Captive insurance companies dedicated to insure any other risk must keep a 5% ratio between their retained net premiums and their net patrimony at the closing of the corresponding fiscal year. At least 35% of those reserves must be invested in Panama among the following operations. A Purchase of bonds, obligations or any other security issued by the Government or any of its agencies. A purchase of securities registered with the National Exchange Commission. Purchase of real state either for rent or for the own use of the company, which must be insured against fire risk for an amount equal to its replacement value. Granting of loans secured with a mortgage, for an amount no higher than 80% of the value of the real state given as collateral. Opening of time and Saving deposits with local banks. Granting of loans secured with pledge on bonds, securities or shares of stock of Panamanian companies registered with the National Exchange Commission or negotiable instruments issued by the Government, for an amount no higher than 70% of the value of the instrument at the moment of the granting of the loan. TAX BENEFITS AND ADVANTAGES Considering that captive insurance companies only can insure or reinsure foreign risks, our legislation expressly states that the premiums received by the company located in Panama as a result of said insurance and reinsurance are not subject to income tax. Consequently, the income earned by the captive insurance company for offshore insurances and reinsurances is tax- exempt. Likewise, dividends paid by captive insurance companies to their shareholders are not subject to income or dividend tax because those dividends are earned from offshore activities. COST OF ORGANIZATION The cost for the incorporation of a Panamanian captive insurance or reinsurance company or the registration of a foreign company to operate as a captive insurance or company from Panama and the obtention of the operating license varies depending on the situation. MAINTENANCE COSTS Captive insurance companies, either Panamanians or foreign registered in Panama, must cover and pay the following official annual expenses to keep the company in good standing: An Annual Registration Tax of US $150.00 the Resident Agent Fee of US $250.00 and the Fee to the Superintendence of Insurance and Reinsurance of US $2,000.00 Panama is the site of the VII International Reinsurance Forum. These expenses are subject to change without notice, and are quoted here as only a very general guidline. Note: Due to the fact that this is a highly customized form of organization, we cannot list an exact price at this time, as each Captive Insurance Company is done to meet specific client needs, which are widely different from client to client. Therefore, we use the highest quality respected law firms who will do the job right and exactly as per your instructions. For this reason, this will require a customized package and quote. Please email: porongo@safe-mail.net, describing your plans and needs.