The growth of financial centres hosting Euro-currency banks and captive insurance companies demonstrates the effective separation of relatively uncontrolled banking and insurance business in economic free zones from regulated operation in national economies. The host countries which have authorized off-shore banking and insurance activities are mainly small developing countries, in particular island states with minimal regulation and the added advantages of substantial tax benefits. The major reason for the rapid growth of Euro-currency banking in off-shore locations and other financial centres from virtually nothing in the 1960s to over $1,500 billion in 1980, has been the exemption of this type of banking from minimum reserve requirements.
Similarly, most captive insurance companies are incorporated in off-shore territories, with minimal legislation and less stringent reserve requirements. A captive is an insurance company established by an industrial or commercial concern (or a transnational group with a common activity) for the insurance of all or part of the risks of that concern or transnational group. Such an insurance institution enables a business concern to build up funds within a specialized vehicle and to design specific policies that meet the needs of its particular commercial requirements. Insurance can be provided to the parent transnational corporation and all its subsidiaries under a world-wide policy. The number of captives has significantly increased over the past years and their existence has substantially intensified competition in the international insurance sector. The more the captive companies provide the type of specialized cover required by the parent, the more they are taking insurance business and premiums from the commercial insurance industry, forcing the latter to become less costly and more innovative. On the other hand, negative influences that the captives can exert on the developing countries should not be overlooked. They can facilitate a large outflow of foreign exchange, without the local governments being aware. Generally, they are not liable to taxes in the countries where the risks are insured, and at times do not even take into account national regulations which protect the insured.
As a reaction to growing possibilities for unregulated operations abroad, the establishment of free economic zones is being considered by some countries as a means to induce the return of some of the business that has been lost to off-shore banking and insurance centres. In 1980, a free insurance zone was opened in New York (USA), followed in 1981 by a free banking zone. Insurance companies established in the zone can underwrite large or special risks without obtaining the permission of regulatory authorities, and resident banks are relatively free from reserve requirements. Reduced control in overseas locations has thus induced the relaxation of interventions in defined geographical areas of a national market. This chain of reduction of control actions is typical, on a small scale, of protectionist retaliations.