Global Movement Of Wealth And The Intersection Of Risk Management And Caribbean IFCs

As the pandemic continues to impact GDP output, there is an ongoing need for national, regional, and international strategies to boost the low and middle-income economies of the small island developing states of the Caribbean.  In the case of Barbados, its existence as an International Financial Centre (IFC) since the 1980s has attracted significant foreign direct investment (FDI). The island and the region still require this investment.

Recently, there has been an agreement amongst the finance leaders from the G7 to adopt a global minimum corporation tax rate.  This rate, mooted at 15 per cent regardless of where companies locate their headquarters, is in response to the view that large multinationals have been shifting their revenues to “tax havens” to reduce their tax liability. 

As an IFC, Barbados has invested heavily in the convergence of its domestic and international taxes to do away with perceived “ring-fencing” and “special regimes.” This investment is in addition to reorienting and modernising the public sector through digitisation of processes, permits and records, specifically to ensure the transparency of beneficial ownership information with respect to legal “persons” and business arrangements. 

Barbados must have more than a passing interest in understanding how the attempt to purpose-fit the global tax rate to meet the demands of the global digital age might reshape global commerce.  There are many legitimate reasons for revenue to be moved internationally by a corporation, but one can only hope that if in obtaining increased tax revenue, the improved public finances will be used to assist with a global pandemic recovery.

There is no doubt that the pandemic has affected “BEACH” economies (Booking, Entertainment, Airlines, Cruise, Hotels), due to severe restrictions in the global travel industry and a fall-off in discretionary consumer spending. The reduction in consumption due to lockdowns has resulted in excess savings that Moody’s ⁽²⁾ has estimated to be US$2.46 trillion in the US alone by April 2021. 

The global focus has to be less about how to tax the big technology companies and more about the economic benefits of forging an equitable vaccine solution that some have estimated could boost the global economy by a projected US$500 billion by 2025.

National Economic Reconstruction

This sets the context for a region whose reality depends on its ability to offer viable opportunities in support of the global movement of wealth. For example, since the beginning of 2021, commodity prices have rebounded to above pre-pandemic levels. Resource-based economies must be able to capitalise on this phenomenon.

The ability of the Caribbean to participate in the extractive industries is evidenced by startups of mining exploration companies.  Barbados as an IFC, with the existence of several resident companies with international affiliations, is strategically placed in the international value chain to facilitate investment into this region. It is instructive that China continues to obtain access to strategic resources via commodity partnerships in Africa and Latin America.  Barbados has bilateral relations with both regions and with China. 

Consistent with this theme, in March 2021, the Government of Barbados announced plans for expanding its diplomatic relations in Africa, Asia and Latin America, including the establishment of diplomatic offices in the United Arab Emirates, Kenya and Ghana and an embassy in Beijing that will also have responsibility for relationships with Singapore and South Korea. The stated objective is the need to facilitate national economic reconstruction, increased investment, and to expand trade in Barbados’ goods and services.

The hardening commercial insurance market has also impacted business strategy with an increasing interest in alternative risk transfer (ART). Global commercial insurance prices increased in Q1 2021 across business lines, continuing the upward trend recorded over the past three years.  ART mechanisms, like captive insurance companies (captives), have been at the forefront of insurance renewals by providing purchasers with a stronger negotiating position within the market. Barbados has long been a stable player in ART since the 1980s.

Unfortunately, the pandemic has highlighted that companies are vulnerable to systemic risk events that were previously never seen as a business priority.  Coverage has been tougher to obtain, with tighter terms and conditions.  There is a lower appetite among traditional insurers, despite customer demand.  Risk management planning of the future, utilising captives in centres like Barbados, will assist in providing coverage for supply chain disruptions and the cost of cyber-attack and fraud due to changes in working arrangements.

Alternate Investments

Amid the growth in global wealth, corporates, and ultra-high net worth individuals (UHNWIs) have been seeking to diversify their portfolios with alternate investments.  Within alternate risk financing, segregated cell insurance companies led the global growth opportunities in 2020 ⁽³⁾.

The legislation governing the segregation of assets and liabilities was first introduced almost two decades ago in Barbados. The benefit of using these special purpose vehicles (SPVs) as “transformer” entities has been evidenced in the insurance-linked securities (ILS) and collateralised (re)insurance market sector to deal with those risk events relating to the natural world.

While the most familiar aspect of the ILS market is probably catastrophe or “cat” bonds, there are also non-tradable, “over-the-counter” contracts that provide investors with access to a wider range of investments in support of the broader underlying insurance risks.  UHNWIs have similarly been seeking risk management solutions for personal financial protection, especially when they have not been able to obtain proper cover in the traditional market.  Estate planning is now including some form of disability insurance, not least because the right for this cover is protected under international law but also an implied fundamental human right under UN convention.  Captives have been evidenced issuing multi-generational Welfare, Disability, Long-Term-Care (WDLTC) policies.

There are further opportunities within the Caribbean for high, value-add investment in medical marijuana, agriculture, energy, and medical tourism.  It is projected that the annual legal sales in cannabis in the US alone will be more than US$45 billion by 2025  ⁽⁴⁾. The regulations under the Barbados Medicinal Cannabis Licensing Authority (BMCLA) licensing regime allow investors the ability to cultivate, transport, process, sell, import, export, and research and develop medicinal cannabis and medicinal cannabis products. The insurance regulation in Barbados allows for the licensing of captives in the medicinal cannabis space.

Recent investment in Barbados in climate-smart agriculture, in the form of a Cat-5 hurricane-resistant greenhouse system to produce organic quality greens for the local market, along with “cold weather” crops like berry fruits, tomatoes, and peppers, has raised a level of awareness of the possibilities within the agriculture sector.  The benefit to the region is enhanced food security and a reduction in vulnerability to food imports, with further investment in agriculture in all formats a real consideration. 

In addition, 2030 has been established by Barbados as the year by which the country is to generate 100 per cent of its energy from renewable sources.  This goal provides significant opportunities for investment in renewable energy systems and storage devices. 

Throughout these initiatives, active risk management through captive insurance solutions can be provided in the supply chain whether as a grower, distributor, trader or investor.

The US$50 billion medical tourism industry, which includes the provision of health care and wellness services such as spas, holistic medical care as well as traditional medical care, is already well established at the global level. Procedures such as cosmetic and orthopedic surgeries (particularly hip and knee replacement), have become commonplace. More recently, dentistry, fertility, and immunotherapy have added to the list of treatments along with alternative medicine and general wellness facilities.  These services have for many years positively impacted the economies in nearby Latin America and Mexico, and in Asia where the industry is more advanced than in the Americas. 

As far as medical tourism is concerned, Barbados’ interaction with source markets like the US, Canada and the UK, its shared language and culture, and its status as a leading tourism and international business destination, provide a distinct competitive advantage. Health care costs in North America have steadily risen over the past two decades, so there has been a demand for both available and affordable procedures even if these services are offered abroad.  Also, difficulties associated with securing appropriate medical insurance is being actively addressed by the ART market.  

In the highly specialised medical tourism market, Barbados has been widely lauded for the operation of an internationally certified fertility clinic for almost two decades, providing solutions to 50 patient countries and nearly 2,500 newborns.

Technological Development

Traditional industries are being impacted by the fast pace of technological development.  Barbados has a sound technology infrastructure, having understood that startups locate in jurisdictions that offer manageable costs supported by a large pool of skilled workers. The country also has a rich ecosystem of suppliers and competitors that include high value-add information and communications technology (ICT) service providers. 

For the investor, Barbados’ ICT sophistication represents opportunities to build out infrastructures for reorganisation and reinvention especially relating to technology upgrades because of changing business models, data privacy, IT security and business continuity.  Barbados must continue to leverage this sophistication, making it clear that the country and region are open for business, especially to those firms that are able to directly or indirectly recruit specialised skilled professionals involved in the development of a competitive digital ecosystem.   

Conclusion

The process towards globally accepted standards will be assisted by improved financial market sophistication alongside adequate securities exchange regulation to increase the free movement of capital and foreign ownership of assets.  The Barbados Stock Exchange has sought to establish a trading platform to enable the listing and trading of security token offerings, while recently being designated as a “recognised” exchange by the HMRC in the UK. This allows for the previously stated objectives of using Barbados SPVs for risk sharing, securitisations, and asset transfers.  

In every respect, Barbados must see itself as more than an IFC and even more than a global services centre.  Investors will always follow the flow of capital. What is clear is that Barbados is ready and able to equally provide investment opportunities and risk management solutions through the strength of its brand as it continues to interact in a meaningful way with the financial markets.

 

Footnotes:

1. Credit Suisse. The Global Wealth Report. London : Credit Suisse Report Institute, 2021.
2. Ryan Sweet, Senior Director-Economic Research. Cost Push or Demand Pull. s.l. : Moody's Analytics, June 10, 2021.
3. Laura Ingram, Editor. World Domicile Update. s.l. : Captive Review, March 2021.
4. Jenel Stelton-Holtmeier, Editor. Marijuana Business Factbook. s.l. : Marijuana Business Daily, April 8, 2021.