Valerie Denney surveys recent developments in the US captive industry.
Despite persistently soft primary markets, the US captive industry, both on and offshore, continues to flourish. There are more new incorporations and existing captives are developing in terms of the size and scope of their operations.
A recent Tillinghast-Towers Perrin survey of 124 risk managers, cfos and captive managers about the future use of captives sheds some light on this trend. Among its findings, the survey highlighted the fact that while the reasons for captive formation have evolved over the years, the element of control is ever present in risk management decisions. As pointed out in the August edition of Tillinghast's Captive Insurance Company Reports: "The control factor is nearly as important as cost savings as a justification for the captive, and explains the trend of record numbers of captives formed in the past three years despite competitive pricing in insurance markets."
It was also pointed out that "captives are diversifying. Twenty percent of the single parent captives surveyed currently write third party risks, and most respondents support plans to broaden the captive's range of functions. They plan to do more with their captives as part of an all-risk strategy, for example, to fund employee benefits or to protect the company against financial risks. Captives will begin to be used as vehicles to increase shareholder value, not only as a result of expense reduction but also through efficient use of corporate capital."
The domiciles, of course, are developing all the time in order to service the captive community as best they can. It must be stressed, however, that this does not mean regulators are dropping standards. Quite the contrary. As Len Crouse, Vermont's director of captive insurance recently pointed out: "Before allowing a captive owner to incorporate a new line of third party business, regulators want to make sure the owner exercises control over the business through underwriting, claims administration or investment management."
Vermont recently celebrated the licensing of its 400th captive. Managed by Willis Corroon, it is owned by Visual Networks, Inc., a Maryland-based firm that manufactures and markets wide-area network management systems.
Ever competitive, Elizabeth Costle, state banking and insurance commissioner, is already looking forward to the domicile's 500th captive.
According to Tillinghast's Captive Insurance Company Reports, Vermont is the home base of over 75% of all US captives domiciled onshore. Ms Costle's ambitions are certainly not far fetched. Aside from the obvious appeal, a 1997 law allowing reciprocal group captives is generating quite a bit of interest. The law levels the playing field with offshore captive domiciles that allow the reciprocal structure.
In addition, Vermont legislators are expected to craft a rent-a-captive law next year which will take advantage of the expanding rent-a-captive niche.
Talking about Vermont's success to date, Derick A. White of the Department of Banking, Insurance, Securities & Health Care Administration has the following to say: "Vermont is the only domicile (foreign or domestic) to have a full time captive staff with very little turnover. This enables us to understand the needs of our captive insurers and work quickly to support them. Vermont has the proven infrastructure (managers, banks, CPAs, etc) that also understands and supports the captive industry. Since Vermont's captive statute was enacted in 1981, all governors and each legislature has worked to keep Vermont a leading domicile."
The offshore contenders, Bermuda and the Cayman Islands are also up there in the big league, of course, but there are plenty of other domiciles, of different shapes and sizes, which are ambitious in their own way.
Georgia, for example, currently has 15 captives to its name (three of these inactive), one of which was licensed last year. All of these are of the association variety with the exception of two industrial entities.
Amanda Jamison of Georgia's Regulatory Services points out that "there may be some legislative review to lower the state's premium tax. Obviously, the decrease would create a more favorable environment for all companies and hopefully encourage more companies to domicile here. However, our legislative session does not begin until January and it is not clear as to whether this issue would be on the docket for this year."
Hawaii has finally topped its long-awaited goal of 50 captives, signifying the critical mass managers reckon is needed to accelerate growth. State captives are permitted to write property/casualty risks including workers' compensation, auto and general liability, surety, credit life and credit disability and some personal lines. Minimum capital requirements are the same as Vermont.
In the US Virgin Islands, seven pure captives are currently licensed. As a territory of the US, the USVI has the protection of the US flag as well as the benefits of the US court system. However, it is not subject to the US tax code. As the chief examiner for the banking and insurance division, Lincoln A. Duggins, points out: "This gives European based companies the best of both worlds, and makes the USVI a particularly desirable port of entry into the US."
He adds: "The division is very interested in seeing captives developing in the Virgin Islands. However, it is necessary that some amendment be made to the current legislation."
With the US captive industry showing no signs of letting up, neither are the domiciles. They are either doing what they can to adapt to developing captive techniques or are considering it. It remains to be seen whether today's winners will stay that way.
Valerie Denney is editor of this publication.