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PROPOSED RULES FOR THE CAPTIVE INSURANCE REGIME IN

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					PROPOSED RULES FOR THE CAPTIVE INSURANCE
  REGIME IN THE QATAR FINANCIAL CENTRE




                                     April 2011
                        Consultation Paper 2011/01
Contents




Invitation to comment

1     Introduction                                                                 5

2     Proposals on the definition of captive insurer                               6

3     Proposals for new minimum capital and eligible capital requirements          9

4     Proposals on protected cell company requirements                             13

5     Proposals on governance, approved individuals and outsourcing
      requirements                                                                 15

6     Proposals on reporting and fee requirements                                  19

7     Redomicile of foreign captive insurance to the QFC                           21

8     Proposed approach to the authorisation and supervision of captive insurers   21


Appendix 1   Proposed draft rules – Captive Insurance Business Rules 2011

Appendix 2   Proposed draft rules – Captive Insurance Business (Consequential Amendments)
             Rules 2011
                               Consultation Paper 2011/01




   PROPOSED RULES FOR THE CAPTIVE INSURANCE
     REGIME IN THE QATAR FINANCIAL CENTRE

Invitation to comment

This Consultation Paper invites comments on proposed rules for the QFC Regulatory
Authority’s (“Regulatory Authority”) regime for captive insurers, including protected cell
companies. The proposed amendments build on the proposals contained in Consultation
Paper 2010/03 to significantly develop the Qatar Financial Centre (“QFC”) as a captive
insurance hub in the region. The proposals reflect the objectives of the Regulatory Authority
of continuing the QFC’s development as a leading financial and business centre in the Middle
East, while ensuring the QFC continues to meet high international regulatory standards. This
Consultation Paper should be read in conjunction with Consultation Paper 2011/02 on the
proposed draft rules for the regulation of captive insurance management and insurance
mediation in the QFC.

Anyone wishing to submit comments should provide details of the organisation he or she
represents. The names of the commentators and the content of their submissions may be
published on the Regulatory Authority’s website and in other documents published by the
Regulatory Authority. If you wish your name or any part of your submission to be withheld
from publication, please indicate this, together with your reasons, when you make your
submission. The Regulatory Authority will then decide whether to publish the name or
material. In doing so, the Regulatory Authority will have regard, in particular, to any
obligations under the Data Protection Regulations 2005, issues of commercial sensitivity and
whether the justification for publication is outweighed (taking into account the Regulatory
Authority’s regulatory objectives) by confidentiality concerns. If anyone has concerns about
confidentiality, they are welcome to discuss them with us before making a submission.



Any comments should be submitted to:

Mrs Prue Morris
Director, Policy
Policy, Enforcement and Risk Division
QFC Regulatory Authority
PO Box 22989
Doha, Qatar

Or emailed to: ConsultationPapers@qfcra.com

All comments must be received by 5 May 2011.




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Abbreviations

AML/CFTR     Anti-Money Laundering and Combating Terrorist Financing Rules 2010
ASET         Asset Rulebook
Captives     Captive Insurers
CAPI         Draft Captive Insurance Business Rules 2011
CP           Consultation Paper
CTRL         Controls Rulebook
GENE         General Rulebook
IAIS         International Association of Insurance Supervisors
INAP         Interpretation and Application Rulebook
INDI         Individuals Rulebook
PCC          Protected Cell Company
PII          Professional Indemnity Insurance
PIIB         Interim–Prudential Investment, Insurance Mediation and Banking Business
             Rulebook
PINS         Prudential–Insurance Rulebook
PRIN         Principles Rulebook
QFC          Qatar Financial Centre
Regulatory   QFC Regulatory Authority
Authority




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1     Introduction

1.1   As part of the Qatar Financial Centre Authority’s strategic plan to develop the QFC as a
      regional hub for captive insurers, the Regulatory Authority released a Consultation
      Paper (“CP 2010/03”) in June 2010 that proposed significant changes to the QFC’s
      current regime for captive insurers. The proposals included a review of requirements
      applying to PCCs, as well as the current regulatory requirements applying to captive
      managers and insurance intermediaries more generally.             These proposals were
      designed to facilitate the development of the QFC as a regional hub for captive
      insurance, as well as to address certain issues the Regulatory Authority has identified in
      relation to the current regime applying to insurance intermediaries.

1.2   This CP builds on CP 2010/03 by proposing significant changes to the QFC’s regimes for
      captive insurers and PCCs.

1.3   In developing the key policy proposals to facilitate the captive hub strategy, the
      Regulatory Authority has been mindful to provide a robust and risk-based regulatory
      regime for captive insurers and captive managers that promotes best-practice
      international standards. The proposed regime also provides an opportunity for industry
      and commercial enterprises in Qatar, the GCC and the international community to
      establish captive insurers in the QFC and to use these entities as an efficient risk
      management tool.

1.4   The proposals in this CP, which are outlined in chapters 2 through to 8, relate to:

      a      defining a new class of captive insurer;
      b      creating new prudential rules specifically for captive insurers;
      c      new capital and eligible capital requirements;
      d      new requirements for PCCs;
      e      new governance, approved individuals and outsourcing requirements;
      f      adjustments to reporting and fee requirements; and
      g      the Regulatory Authority’s proposed approach to            the     authorisation and
             supervision of captive insurers.
1.5   These proposals are reflected in the proposed rules contained in the draft Captive
      Insurance Business Rules 2011 attached to this CP. As a result of the proposed rules, a
      range of consequential amendments are required to other Regulatory Authority rules,
      which are contained in the Captive Insurance Business (Consequential Amendments)
      Rules 2011 attached to this CP.

1.6   These proposals are relevant to authorised firms, captive insurers, captive managers
      and prospective firms.

1.7   This CP contains the following appendices:

      a      Appendix 1: draft Captive Insurance Business Rules 2011 (“draft CAPI rules”)

      b      Appendix 2: draft Captive Insurance Business (Consequential Amendments)
             Rules 2011.

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2      Proposals on the definition of captive insurer

       Background

2.1    The Regulatory Authority currently recognises three classes of captive insurer as
       detailed in Table 1 below.

Table 1

    Class of Captive                                     Type

Class 1                  A single parent company that writes only contracts of insurance in
                         respect of risks related to their owner and/or affiliates. It is a form
                         of self-insurance risk management tool of its owner.

Class 2                  A captive that can write up to 20% of gross written premium from
                         third party risks (i.e. unrelated business) in addition to the risks of
                         their owner and/or affiliates.

Class 3                  This class is normally a multi-owned insurance company writing only
                         the risks of its owners and/or affiliates, usually within a specific
                         trade or activity. For example, a motor vehicle trade association
                         that is self-insuring.    This captive insurer is used as a risk
                         management tool of its owners and/or affiliates.



2.2    The current captive insurer classes 1 – 3 are well recognised types of captives. A class
       1 captive represents the lowest regulatory risk because there are no unrelated party
       policyholders (i.e. the owner and the policyholder of the captive are the same entity),
       although the underlying beneficiary of the policy may be a third party, such as an
       employee of the group. In any insolvency of the captive insurer, the owner would be
       liable to cover the claims. A class 3 captive also presents a lower risk to the Regulatory
       Authority as there are no unrelated party policyholders as the owners (for example, the
       members of the trade association) and the policyholders are in effect the same. A class
       2 diversified captive presents a higher risk to the Regulatory Authority as they are
       underwriting risks for unrelated party policyholders or even compulsory third party
       liability risks, although only a very small portion.

2.3    A number of jurisdictions use a very similar framework to define types of captive
       classes, although some have extended the definition to include more unique structures,
       such as rent-a-captives.       Currently, rent-a-captives, producer owner reinsurance
       captives and other unique captive structures are not accommodated within the QFC
       definition and classes of captive insurer.

2.4    CP 2010/03 highlighted that the Regulatory Authority was proposing to review whether
       to further extend the definition of a captive beyond classes 1 to 3. Submissions
       received on CP 2010/03 supported this proposed review.




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                               Consultation Paper 2011/01




      Proposal

      New class of insurance captive

2.5   After assessing the potential risks attached to captives generally and particular captive
      structures, the Regulatory Authority considers there is merit in ensuring the definition
      of a captive insurer does not limit the ability for captive insurers to establish new
      structures in the QFC or unduly restrict the innovation and industry use of captives in
      the QFC.

2.6   On this basis, the Regulatory Authority is proposing to retain captive insurer classes 1
      to 3 and to provide for a new “class 4”, which could include any other captive insurer as
      determined by the Regulatory Authority on a case-by-case basis. Characteristics of a
      “class 4” captive could include:

      a      multiple unrelated shareholders whose interests would not necessarily be
             aligned through commonality of the risks insured. This would include PCC
             structures or rent-a-captives; and

      b      risks insured by the captive insurer that do not originate from the shareholders.
             These risks are assumed by the captive insurer from third parties and the
             captive will be used in a manner similar to a special purpose vehicle. This would
             include producer owned reinsurance captives.

2.7   Including a flexible “class 4” avoids the issue of trying to define a moving target in
      terms of potential structures and the various possible permutations of captive insurers.
      The Regulatory Authority will be able to address higher risk captive insurers on a case-
      by-case basis. It will also be able to be responsive to situations where the owners are
      separate to the policyholders but where it can be clearly demonstrated that the captive
      insurer has been established for a restricted pool of policyholders with a common set of
      interests (in essence, another form of self-insurance or risk management tool).

2.8   The proposal will allow the Regulatory Authority to consider other potentially higher risk
      captive forms in the proposed “class 4” if:

      a      there is a sound business rationale for the captive proposal;

      b      the captive is being used as a risk management tool;

      c      the nature of shareholder interests and whether they are aligned or have some
             commonality with the policyholder;

      d      the shareholder has a unique and expert knowledge of the risks being insured
             by the captive; and

      e      the captive structure is appropriate for the proposed types of activity rather
             than an attempt to set up businesses that are commercial insurers.




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New rules

2.9     Following further consideration of the current regulatory framework for captive
        insurers, the Regulatory Authority believes it would also be beneficial to create new
        rules specifically for captive insurers, including PCCs. Currently, the rules relating to
        captive insurers are contained in the Prudential-Insurance Rulebook (“PINS”); however,
        there are sufficient differences in the proposed regulatory treatment of captive insurers
        to justify separate rules. The creation of separate rules for captive insurers would
        adequately reflect the unique risk profile of captives and add to the ease and simplicity
        in understanding the regulatory regime for captives.

2.10    It is proposed the new CAPI rules would include:

        a      the prudential requirements for all captive insurers, including PCCs; and

        b      outsourcing arrangements for captive insurers.

2.11    It is important to note that requirements of a more general nature that apply to all
        authorised firms in the QFC, such as those on systems and controls, controlled
        functions and approved individuals, principles, and anti-money laundering rules, would
        continue to apply to insurance intermediaries and captive managers1 (although many of
        these functions and requirements would be outsourced to the captive manager).


Chapter 2 questions

2.1    Do you agree with the proposed approach to expanding the definition of captive insurers?
        If not, why not?

2.2    Do you agree with the proposal for new rules for captive insurers? Are there other
       requirements that could be contained in the CAPI rules that currently rest in other
       Regulatory Authority rules?




 These requirements are contained in various Regulatory Authority rules, such as INDI, CTRL, GENE,
1

PRIN, and AML/CFTR.

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                               Consultation Paper 2011/01



3     Proposals for new minimum capital and eligible capital requirements

      Background

3.1   The Regulatory Authority currently requires captive insurers to hold capital of
      whichever is the higher of:

      a      the base capital requirement; or

      b      the risk-based capital (“RBC”) requirement.

3.2   Table 2 below shows the current base capital requirements for each class of captive
      insurer.

             Table 2

                    Class of Captive                Base capital requirement



               Class 1                      $150,000

               Class 2                      $1 million

               Class 3                      $250,000


3.3   CP 2010/03 proposed to review the minimum capital requirement in PINS that applies
      to captive insurers, in particular to determine whether:

      a      the levels of base capital are appropriate to the nature of the underlying risk
             profile of the businesses, including whether this requirement should distinguish
             between captives writing long-term insurance business and general insurance
             business; and

      b      the RBC calculations for captive insurers remain appropriate and whether an
             alternate solvency test should be applied, at least to some classes of captives.

      Proposals

Minimum capital requirements

3.4   The Regulatory Authority reviewed a number of capital models used in leading captive
      insurance jurisdictions. A common feature of the capital models reviewed is the
      combination of a minimum capital requirement and an additional solvency test that is
      more risk sensitive.




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                                 Consultation Paper 2011/01




3.5     The Regulatory Authority accepts that captive insurers in classes 1 – 3 are generally
        different from commercial insurers and may have a lower risk profile. Accordingly, in
        examining the most appropriate capital model for captive insurers the following aspects
        were considered:

        a      the risk appetite of captive owners; the large majority of typical captive insurers
               are formed as part of the owner’s risk management program and are a form of
               self-insurance with limited public or third party exposure, so there is limited
               impact should an insolvency ensue (i.e. legal recourse could be sought from the
               parent entity as the primary obligor);

        b      capital levels must be sufficient to protect the captive insurer from unforeseen
               losses;

        c      prudential capital models should attempt to measure the risks inherent in the
               risk profile of the captive business and should take into account the nature, size
               and complexity of the captive insurer; and

        d      captive insurers normally have a good knowledge of reported claims and claims
               experience since their owner is usually the only claimant and the captive insurer
               is used as a risk management tool. This makes it easier for captive insurers (in
               contrast to general insurers) to properly establish their ultimate net reserves
               and for them to directly benefit from their loss experience. However, for liability
               lines compared to property a greater range of uncertainty will still exist.

3.6     The Regulatory Authority therefore proposes to adopt the following capital model for
        class 1 – 4 captive insurers in the QFC:

Table 3

Capital model                                          Captive        Captive         Captive
                                                       Class 1      Class 2 & 4       Class 3
A. Base capital requirement                            $150,000      $1,000,000        $250,000

B. Risk-based capital requirement (greater of B.1 or B.2)

      B.1 Premium risk module (% of net written premium)

       First $5m of net written premium                    20%             20%              20%
       Plus: net written premium thereafter                15%             15%              15%

      B.2 Loss reserve risk module (sum of the following % of loss reserves)

            Net loss reserves on Property insurance          5%             5%               5%
            Net loss reserves on Liability insurance        15%            15%              15%
            Net loss reserves on Life business             2.5%           2.5%             2.5%

3.7     The captive insurer’s minimum capital requirement is proposed to be the higher of:

        a      the base capital requirement (item A); or

        b      the risk-based capital requirement (item B).

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3.8        The Regulatory Authority proposals would see a “class 4” captive hold a minimum base
           capital of $1 million to take account of their intrinsically higher risk profile. The
           Regulatory Authority would retain the right to impose a higher base capital requirement
           for a class 4 captive insurer, depending on the nature, scale and complexity of its
           business. This approach allows the Regulatory Authority to mitigate the potential risks
           arising from more complex or higher risk captives on a case-by-case basis.

3.9        The calibrations shown above have a size discount to capture potential diversification
           benefits derived from the underwriting of uncorrelated risks. The calibrations of the loss
           reserve risk element in turn reflect the fact that liability business warrants a larger
           capital buffer. This is because of the potential long-tail nature of liability business in
           terms of the development of claims and losses that are intrinsically more volatile than
           short-tail property business. For liability insurance, in particular, the percentages above
           take into account the fact that for liability business, beneficiaries may be innocent third
           parties that need additional regulatory protection (e.g. workers compensation for
           employees of the captive owner).

           Eligible capital

3.10       Due to the lower risk profile of some captive insurers, a number of jurisdictions active
           in licensing captives provide scope for more innovative capital instruments to be used
           to meet minimum capital requirements, e.g. third party letters of credit (“LoCs”), or
           higher ratios of tier-two to tier-one capital, or allow increased use of lower tier two
           capital, such as subordinated debt. This approach has also been supported by the
           IAIS2.

3.11       The Regulatory Authority has further considered the issue and is proposing that LoCs
           be explicitly permitted as an innovative form of eligible capital for captive insurers,
           subject to certain conditions being met:
           a       that LoCs are eligible for tier-two capital so long as the firm’s tier-two capital
                   does not exceed its tier-one capital. Further, LoCs would not automatically be
                   accepted as eligible capital but each arrangement would be subject to an
                   approval by the Regulatory Authority; and

           b       That LoCs:
                   i        are unconditional and irrevocable;
                   ii       include no subordination clause;
                   iii      are legally enforceable in the QFC or an equivalent jurisdiction;
                   iv       cannot be cancelled or amended without the consent of all parties;
                   v        are for a fixed amount; and
                   vi       are renewed annually.




2
    See IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers, 17 October 2008.


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3.12   The Regulatory Authority is also considering the merit of a number of approaches to
       LoCs, such as:

       a      prescribing the form and content of the LoC and approving a standard form LoC
              to be used by captive insurers in the QFC;

       b      prohibiting the captive insurer from providing any collateral to the bank
              (collateral, if any, will be provided by the captive’s parent in connection with the
              reimbursement agreement);

       c      prescribing the criteria to be met by banks providing LoCs, for example,
              i         the bank providing the LoC must be rated at least BBB+ (S&P) or
                        equivalent and be regulated by a supervisor in a jurisdiction acceptable
                        to the Regulatory Authority or with equivalent regulation to the QFC; and
              ii        if the rating of the bank providing the LoC falls below BBB+ this       will
                        automatically trigger a requirement for the captive to either replace   the
                        LoC with another LoC, inject other forms of eligible capital within a   set
                        timeframe or, failing that, the Regulatory Authority will instruct      the
                        captive to draw on the LoC within a prescribed time period.

3.13   After careful consideration, the Regulatory Authority does not consider it appropriate at
       this stage, to allow explicitly for other innovative financial instruments such as parental
       guarantees, loan backs, unpaid share capital and subordinated debt to be eligible forms
       of capital), although it will continue to review this issue and may consider other forms
       of eligible capital on a case-by-case basis.




       Chapter 3 questions

       3.1        Do you agree with the proposed new capital model? If not, why not?

       3.2        Do you believe that the new capital model is calibrated to the correct level? If
                  not, why not?

       3.3        Do you agree with the proposed approach to eligible capital? If not, why not?




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4     Proposals on protected cell company requirements

      Background

4.1   Currently, the PCC is a recognised form of legal entity in the QFC and may be
      incorporated in the QFC under the Companies Regulations 2005. The guidance in PINS
      only permits PCCs that are insurers to establish a cell if they are conducting insurance
      business as a class 1 captive.

4.2   CP 2010/03 proposed to review several areas relating to the current requirements for
      PCCs, including:

      a      whether a PCC insurer should be able to establish cells that conduct insurance
             business that extend beyond class 1 captive business;

      b      the minimum capital requirements applying to a PCC and to the cell of a PCC;
             and

      c      clarifying the regulatory status of cells.

4.3   Feedback on CP 2010/03 supported these proposals, with one respondent noting that
      restricting PCCs to class 1 captive business could severely restrict the growth of captive
      cell business in the QFC.

      Proposal

4.4   The Regulatory Authority has further reviewed these issues and is proposing the
      following amendments to the current PCC regime.

      Scope of business

4.5   The Regulatory Authority sees merit in ensuring the QFC regulatory framework does
      not limit the ability for captive insurers to establish new structures in the QFC or unduly
      restrict the innovation and industry use of particular captive forms.

4.6   It is therefore proposed that the Regulatory Authority permit all forms of captive
      insurers to establish PCCs, subject to the Regulatory Authority’s approval. Class 4
      captives will only be permitted to establish a PCC on a case-by-case basis, according to
      the discussions outlined in chapter 2.

      Minimum capital requirements

4.7   The Regulatory Authority has reviewed whether the current approach of applying
      minimum capital to every cell in the PCC is appropriate, supports the captive hub
      proposals and is in line with any new developments in the regulation of PCCs.

4.8   The Regulatory Authority proposes that:

      a      if the PCC is structured so that individual cells do not have recourse to the core
             capital (through a suitable recourse agreement), the core of the PCC will be
             required to hold $50,000 in minimum capital;
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                                 Consultation Paper 2011/01



       b        the current position of applying minimum capital requirements to every cell in
                the PCC continue;

       c        each cell would be required to meet the risk-based capital requirement
                component of the minimum capital test that is proposed for captive insurers;

       d        the capital required will depend on which captive class the cell belongs, (treated
                as if it were a captive in its own right) (see Chapter 3, Table 3, Item B).

4.9    Where the PCC is structured so that individual cells do have recourse to the core capital
       (this type of corporate structure is currently permitted under the Companies
       Regulations 2005) a higher amount of minimum core capital will be required and
       decided by the Regulatory Authority on a case-by-case basis.

4.10   By applying the capital requirements to individual cells of a PCC it is more sensitive to
       the size and type of business operations performed by the individual cells. It also
       provides a level playing field for captive insurers and captive PCC structures.

4.11   The proposals in this CP in relation to eligible capital for captive insurers would also
       apply to each cell.

       Regulatory status of cells

4.12   Given the PCC and the cell are one legal entity, it is further proposed that the PCC
       would be authorised as a captive insurer and would need to go through a registration
       approval process by the Regulatory Authority for each cell. The Regulatory Authority
       considers that individual registration of cells is important as it understands PCC cells
       tend to be relatively small in size but there can be material differences across cells in
       terms of the business model used and complexity of operations. Registration of the
       individual cell will ensure the Regulatory Authority’s awareness of the business being
       performed by the PCC, so there can be limited opportunity for a cell to establish outside
       of the scope of authorisation of the PCC. This regulatory control is also essential from
       an AML/CFT regulatory perspective.



           Chapter 4 questions

       4.1       Do you agree with the new requirements relating to PCCs? If not, why not?

       4.2       Are there any other areas where the QFC regime for PCCs could be improved in
                 order to facilitate the development of a captive insurance hub in the QFC?




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5           Proposals on governance, approved individuals and outsourcing requirements

            Background

5.1         In CP 2010/03, the Regulatory Authority proposed a number of areas for review in
            relation to captive insurers, including:

           a         whether enhanced governance requirements, including the appointment of a
                     representative, are required;

           b         the issue of controlled functions and approved individuals for captive insurers;
                     and

           c         whether current outsourcing requirements under CTRL are sufficient to take
                     account of the potential operational risks arising from the outsourcing
                     arrangements between the captive insurer and captive manager.

5.2         Submissions received on CP 2010/03 supported the review of these areas. While
            submissions made a number of specific comments which are addressed below, no
            significant issues were raised.

            Proposals

            Governance

5.3         Currently the Regulatory Authority does not mandate in rules, requirements for board
            membership, independence of directors, residency or the holding of board meetings in
            Qatar. The only mandated requirement is in the current QFC Companies Regulations3
            that require a Limited Liability Company (“LLC”) to have at least one director. Issues of
            governance, including appropriate board membership are controlled through the fit and
            proper criteria assessment of the collective suitability of the Board, senior management
            and executive during the authorisation process.

5.4         Some jurisdictions mandate a particular number of board members, although there is
            no consistent figure, while others place requirements on board members to be resident
            in the jurisdiction or to hold a certain number of board meetings within the jurisdiction.
            One submission to CP 2010/03 suggested that the Regulatory Authority may consider
            whether it would be appropriate to require at least one board meeting to be held in
            Qatar.     A number of jurisdictions also require a captive insurer to appoint a
            representative.

5.5         The Regulatory Authority has considered the above issues and does not consider that
            prescribing any additional governance requirements would be of any added benefit to
            the governance of the captive insurer or Qatar’s captive hub strategy.

5.6         Accordingly, it is not proposed to change the current governance requirements. The
            Regulatory Authority is also not proposing to require the appointment of a
            representative, as a captive insurer will be required to have at least one approved

3
    Article 52 (1), QFC Companies Regulations


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                                Consultation Paper 2011/01



       individual resident in Qatar (although this individual may be from the captive insurer’s
       manager).

       Controlled functions and approved individuals

5.7    No submissions received on CP 2010/03 raised the need for the Regulatory Authority to
       move away from its current controlled function process.

5.8    Key issues raised in submissions on this topic related mainly to the streamlining of the
       appointment of approved individuals where the individuals have already been approved
       by the Regulatory Authority to perform the relevant controlled functions. For example,
       if an individual in a captive manager is already approved as the compliance oversight
       function, they should not have to go through an extensive approval process to be the
       compliance oversight function for the captive insurer or any subsequent captives. The
       Regulatory Authority understands that such processes are common across some
       captive insurance jurisdictions.

5.9    After considering all the approaches on this issue in other jurisdictions, it is considered
       the Regulatory Authority’s controlled function process remains appropriate for captives
       insurers. However, there is merit in streamlining the approved individual process,
       particularly where individuals from a captive manager have already been approved by
       the Regulatory Authority to perform the relevant controlled function because they have
       the requisite qualifications for the role and have been assessed as being qualified to
       perform that function (e.g. compliance oversight function). If this is the case, the
       Regulatory Authority does not propose to require an additional extensive approval
       process for the same controlled function in subsequent captive insurers and any
       process should be a streamlined administration process.

5.10   A further suggestion by respondents was that consideration be given to approving the
       captive insurance manager in a corporate position for certain controlled functions for
       captive insurers. For example, rather than approving an individual to act as the
       compliance oversight function for Captive A, approval would be given for the captive
       manager to act as the compliance function in a corporate capacity. The benefit argued
       is that, if there is a change in staffing at the captive manager at the corporate level,
       they would not need to go through the authorisation process.

5.11   The Regulatory Authority considers that corporate approvals for specific functions does
       not allow the Regulatory Authority to consider the skills, experience, fitness and
       propriety of the individual performing the function and creates a regulatory risk that is
       unnecessary. If the approval of individuals can be streamlined as outlined in paragraph
       5.9, it is considered the lack of a corporate approval process would not be a
       disincentive to the regime.

5.12   Additionally, the Regulatory Authority will be relying on the captive manager to
       undertake due diligence checks on approved individuals. The Regulatory Authority will
       use its discretion and only seek to interview approved individuals where there is a
       particular regulatory reason to do so.




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5.13   The Regulatory Authority would also be relying on the captive manager to effectively
       manage the captive insurer and discharge its compliance and other responsibilities for
       the captive insurer including management of any conflicts of interest. Further, the
       captive insurer board members will also have the responsibility for ensuring conflicts of
       interest are managed appropriately. Authorisation at the initial application phase, and
       Supervision as part of its supervisory approach will assess how captive insurers are
       managing conflicts of interest and how the captive manager is allocating its time
       between the captive insurers it is managing.

5.14   The table below summarises the proposal for controlled functions of captive insurers.

       Table 4

       Captive insurer                          Captive Manager

       Typical controlled functions             Typical controlled functions

       Executive Governance Function            Senior Executive Function*

       Non-Executive Governance Function        Compliance Oversight Function*

                                                MLRO Function*

                                                Finance Function*

       * proposal is that once this             Risk Management Function (if applicable)
       individual is approved for the
       specific controlled function they will
       also be the approved individual for
       the same controlled function within
       the    captive    insurer  and    any
       subsequent captive insurers.




       Outsourcing

5.15   The usual captive insurer model places significant reliance on the captive manager for
       the day-to-day running of the captive insurer including the management, underwriting,
       regulatory, accounting, secretarial, compliance and administrative duties.        The
       Regulatory Authority believes it is therefore appropriate to impose more tailored
       requirements on the captive’s outsourcing arrangements.

5.16   Captive jurisdictions usually explicitly permit the captive insurer to outsource its day-
       to-day functions to an authorised/licensed captive manager. In most jurisdictions,
       there is a requirement for an outsourcing agreement/service agreement to be in place
       between the parties and depending on the jurisdiction particular matters must be
       included in the terms of the agreement.

5.17   The Regulatory Authority also considers there is reputational risk to the QFC in allowing
       captive managers located in other jurisdictions to manage QFC authorised captive
       insurers. The objective of the QFC captive hub strategy would be difficult to achieve by

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                              Consultation Paper 2011/01



       permitting a captive insurer with no real “mind and management” in the QFC to use a
       non-QFC captive manager.        It is therefore proposed that any captive insurer
       established in the QFC only be permitted to use a captive manager authorised in the
       QFC.

5.18   Additionally, an appropriate outsourcing agreement must be in place between the
       captive insurer and QFC captive manager as outlined in the draft rules.


       Chapter 5 questions

       5.1    Do you agree with the proposals in relation to governance, approved
              individuals and outsourcing? If not, why not?




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                                        Consultation Paper 2011/01



6          Proposals on reporting and fee requirements

           Background

6.1        Currently, captive insurers are subject to annual reporting. The IAIS Guidance Paper4
           suggests that supervisors of captive insurers should receive sufficient reporting to
           monitor solvency and assess compliance with the applicable legislation to identify
           potential problems. No minimum reporting requirement is suggested although more
           frequent reports should be sought as required by the supervisor. Annual reporting is
           also common among typically known captive jurisdictions.

6.2        The Regulatory Authority also considered upfront application fees and annual fees
           imposed on captive insurers, PCCs and approved individuals. These are issues given
           some consideration by the captive insurer in its decision to establish in a jurisdiction.

           Proposals

           Reporting

6.3        It is not proposed to change the current annual reporting requirements for captive
           insurers. Given the lower risk profile of captive insurers in classes 1 - 3, annual
           reporting requirements should continue to apply. However, more frequent reporting
           may be required by the Regulatory Authority for a particular captive insurer (e.g.
           proposed class 4) and depending on the nature, scale and complexity of the captive
           insurer’s business. PCCs and individual cells would also be subject to annual reporting,
           with specific forms applicable to each.

           Fees

6.4        After discussions with the QFC Authority and also researching other captive
           jurisdictions, the Regulatory Authority is proposing that application and annual fees
           should be reduced in order to ensure they support the captive hub strategy by not
           imposing unnecessary barriers to entry. In particular, it is proposed to reduce the fee
           structure in relation to captive insurers in accordance with Table 5 below.




4
    IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers, 17 October 2008.


                                                          19
                        Consultation Paper 2011/01




Table 5

Activity                            Current Fees             Proposed Application
                                                             and Annual Fees

Effecting a contract of insurance   USD 10,000               USD 5000
or carrying out a contract of
insurance (as a captive insurer)

Effecting a contract of insurance   USD 10,000               Core: USD 8000
or carrying out a contract of
insurance as a PCC                                           Cell: USD 1000

Each approved individual            USD 500 per individual   No fee if the approved
employed by the firm                                         individual is from the
                                                             captive manager and
                                                             approved in that
                                                             controlled function.
                                                             Full fee if not already
                                                             approved.




Chapter 6 questions

6.1    Do you agree that captive insurers should report on an annual basis?




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                              Consultation Paper 2011/01




7     Redomicile of foreign captive insurance to the QFC

      Background

7.1   The Regulatory Authority was requested to confirm its position in the Consultation
      Paper in respect of the redomicile of foreign captive insurers to the QFC.

      Proposals

7.2   Currently, the Companies Regulations 2005, Part 5 permits the migration of foreign
      body corporates to the QFC (i.e. permits the redomiciling of foreign captive insurers)
      and also permits QFC body corporates to migrate to foreign jurisdictions, subject to
      certain conditions.

7.3   Consistent with this broad policy, the Regulatory Authority will permit foreign captive
      insurers to re-domicile to the QFC. There is no automatic entitlement to re-domicile to
      the QFC and each foreign captive insurer will need to meet the international best-
      practice standards of the QFC that are reflected in the requirements of the Companies
      Regulations, and the authorisation criteria and CAPI rules of the Regulatory Authority.

7.4   Applications for redomiciling will be reviewed in line with the Regulatory Authority’s
      existing standards, with a focus on any risks that a proposal may present to the
      Regulatory Objectives of the Regulatory Authority. For captive insurers that operate as
      part of regulated groups, the Regulatory Authority will, in line with its general
      approach, expect transparency to the group supervisor to be maintained.


8     Proposed approach to the authorisation and supervision of captive insurers


8.1   The submissions received from key stakeholders emphasised that the success of the
      captive hub strategy will depend, in part, on the Regulatory Authority operating a
      streamlined authorisation and supervision approach for captive insurers.

8.2   The Regulatory Authority is supportive of the captive hub strategy and has sought to
      ensure the regulatory regime applying to captive insurers and captive managers can
      easily be established through separate rules for captive insurers and captive managers.
      Additionally, the Regulatory Authority will also be preparing a “Guide to the
      Authorisation Process” for captive insurers and captive managers to assist prospective
      applicants.




                                           END




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