The US captive industry continues to flourish, as risk managers become increasingly sophisticated in their use of captives. Insurance market pricing is no longer a vital component in the decision to set up a captive. Reflecting this the number of US captive domiciles has increased in recent years. In this domicile overview, Lee Coppack and Valerie Denney find that there is still a wide gap between the large players and the small.

British Colombia
British Colombia has for some time wanted to widen its target audience among captive sponsors, and in 1998 the provincial government amended the International Financial Business (Tax Refund) Act to allow non-residents to use a BC captive to insure property or events outside Canada. The measure also gives relief from BC income taxes, which reduces the effective income tax rate to below 30%.

So far the impact has not been material. The number of captives in BC remains around a steady 16 or 17, according to deputy superintendent of insurance, Larry Neilsen, with the loss or gain of one or two companies a year.

Canada's western-most province, BC has a population of around 2.6 million of whom more than half live in Vancouver and the lower mainland. Vancouver is a substantial commercial centre with a cross section of the financial, technical and professional skills needed to implement, incorporate and manage a captive insurance company, according to Kevin Day, managing director of Day & Koh Management Inc. The major insurance brokers and a number of independent firms have captive management expertise and experience in their Vancouver offices. He also says that “Vancouver is home to a small but growing reinsurance market with expertise being developed in the specific area of captive reinsurance.”

Sixteen captives and 12 pools are based in Colorado, specialising in medical malpractice, workers' compensation and product liability.Permitted business includes commercial and employee benefits. The minimum required to operate on a pure or group basis is $500,000.The Colorado Association of Captive Entities continues to hold regular meetings, looking forward to greeting new members.

America's corporate capital, home to four fifths of the Fortune 500 companies, remains a bit player in the captive domicile stakes.
Seven captives are currently licensed. Permitted business includes property, casualty, surety, marine and transportation, and reinsurance. No personal, workers' compensation, or employers' liability is allowed on a direct basis. “Unrelated” business may be written as reinsurance.
With an eye to future development, insurance regulators plan to amend the state's captive law.

Georgia currently has 15 captives to its name, one of which was licensed last year. All of these are of the association variety with the exception of two industrial entities. Hardly a surprising trend considering the modest initial fees, uniform capitalisation requirements and fairly non-restrictive regulatory environment.

Casualty lines are permitted, except accident and sickness, marine and transportation, property and surety. No personal lines are allowed.Although established as a captive domicile back in 1988, Georgia has not managed to make a major impact in the captive world.

Hawaii and Vermont are the two most successful US states at attracting captives. Growth has been steady, mainly from US west coast sponsors, since the initial passage of the enabling law in 1987. The Hawaii Insurance Department has plans to further expedite the regulatory process and increase accessibility to those supervising captives.

There is a very active Hawaii Captive Insurance Council (HCIC) which was organised informally in 1990 and formally a year later by members of the developing captive infrastructure community. Its role is to act as a liaison with the state insurance division on matters affecting captives and assist the state in promoting Hawaii as a quality domicile.

HCIC administrator David Taylor says: “The insurance division of the state, which oversees the regulation of captives, has developed a reputation for sensitivity to the individual needs and objectives of captives while providing quality regulatory attention, without over-regulation.”

The HCIC motto is “Helping you get to Hawaii”.

Despite its obvious appeal as a mature financial centre, Illinois has failed to live up to its self-proclaimed captive title, “domicile of choice”. Established more than a decade ago, the domicile has only mustered eight captives.

All lines of property/casualty can be written, with the exception of workers' compensation (which can be reinsured). As is the case with many US domiciles, life, personal auto, homeowners and personal risk are not permitted.

Three types of captives are permitted: pure, association and industrial insured.

Although one of the newcomers to the captive industry, (captive legislation enacted in September 1997) Maine already enjoys a well developed insurance community including numerous commercial carriers and service providers. The state has developed a good reputation regulating self-insured groups and risk retention groups and is now hoping to develop a similar working relationship with the captive fraternity. Just recently it awarded its first licence to Bank One of Ohio. The captive will be reinsuring private mortgage insurance on mortgage loans through the bank, marking the first time an insurance regulator has agreed to allow a bank to reinsure its mortgage risk in a subsidiary. The state has indicated it is likely to welcome more bank reinsurance captives.

Maine captives may write all property/casualty lines except personal auto and homeowners. Also allowed are credit life and health, marine, surety and title insurance. In addition, captives may insure controlled unaffiliated business as long as there is a contractual relationship.

The capital and surplus requirements are identical to Vermont's: $250,000 for pure captives; $750,000 for associations; and $500,000 for risk retention groups.Start-up costs and annual fees are low and there is a concessionary rate on the first $20 million of direct premium. For redomesticating captives, the filing fee is halved to $500 and there is a streamlined application process.

New York
Corporations with a minimum net worth of $100 million have been able to form and operate captives in the state since late 1997. Single parent or group captives are permitted, covering most property/casualty lines of business. Excluded are title, mortgage guarantee and financial guarantee insurance. Reinsurance is permitted as is third party business via assumed reinsurance, with the latter requiring the approval of the superintendent of insurance. No personal lines business is allowed.

Among the benefits on offer are a quick turnaround on applications, competitive tax and assessment rates, minimal investment restrictions, accessibility to regulators, and New York's highly developed business infrastructure.

Two captives are currently licensed, including the New York Metropolitan Transportation Authority's First Mutual Transport Assurance which provides the authority with liability coverage.

The first Spanish speaking captive domicile, Panama is strongly marketing itself toward Latin America having passed its captive legislation in 1996. It is hosting the first Latin American captive forum to be held in Panama City from 27 to 30 June.

From its geographic position between North and South America and at the narrowest point between the Atlantic and Pacific Oceans, Panama has played a crucial role in the history of the development of Latin America. The Spanish established the first settlement in Panama in 1510. The idea of a canal across the isthmus had been suggested even in the 16th century but a French attempt to build a canal in 1880 ended in the death of thousands of workers from malaria and yellow fever and bankruptcy for everyone involved.

Friction between Columbia of which Panama had become a province and the United States continued over many years, but the US was eventually able to restart construction of a canal in 1904. Ten years later the first ship navigated the passage between the two oceans. Under a treaty between Panama and the US signed in 1977, Panama is due to take over complete control of the canal this year.

Rhode Island
Captive legislation allows for all lines of property/casualty. Personal lines, health and life insurance are not permitted.
While there is no minimum premium for pure and association captives, there is a minimum aggregate annual premium of at least $25,000 for industrial insureds.So far, no captives are licensed.

South Dakota
South Dakota enacted its captive insurance company law in mid 1996. To date, no captives have been formed. Chief examiner for the South Dakota division of insurance, Wendell Malsam, comments that the domicile's law is unique in that it only provides for pure captive insurers which is defined to be a company that only insures risks of its parent or affiliated companies. Since a pure captive insurer and its affiliated companies is in many respects similar to a self-insured group of affiliated companies, regulation is as minimal as possible.

There are no corporate or individual taxes. The premium tax rate is 0.25% with a minimum premium tax of $5,000. Minimum capital and surplus is $200,000.

Tennessee's captive insurance legislation dates back to 1978, but the domicile still has not managed to make a notable mark in the captive sector.Of a total of 13 captives, the majority serve the medical profession with professional liability, errors and omissions, and medical malpractice lines. Workers' compensation, casualty and reinsurance are also permitted in the domicile. Personal lines and employee benefits are not.
Capital and surplus requirements are as follows: pure - $750,000; association, mutual and industrial insureds - $1 million.Turks and Caicos Islands

Last year saw a significant increase in the number of new captives registered in the Turks and Caicos Islands. A total of 13 new captives, less five that were removed from the register, meant a new gain of eight bringing the total to 76. In addition to captives, TCI has a particular niche as a centre for credit life insurance.The vast majority of sponsors - 96% - are of North American origin. By industry sector, they include marine related (9%), services warranty (9%) and employee benefit (33%) enterprises. Workers' compensation and employee benefits are among the most important classes of business written by TCI captives. A majority (53%) are group captives.

There were no significant legislative or regulatory developments during 1998, insurance superintendent Colin Holder says. “We concentrated on tidying up and strengthening existing regulatory structures and on areas such as mutual funds and trust legislation.” In the current year, he says, fines may be introduced for late submission of financials.

Lying to the south-east of the Bahamas, the Turks and Caicos Islands are a part of the Bahamas chain. Grand Turk is the capital island and business centre. Governed by Britain in one form or another since the late 17th century, the islands remain under the British Crown, and their law is based on English common law, together with locally enacted legislation.

United States Virgin Islands
Eight captives are based in the USVI which 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. Simply put, the USVI is an onshore domicile with offshore advantages.

Single parent, industrial insured and association captives are all allowed. They are permitted to write all lines except motor vehicle and homeowners insurance. Since the USVI is a “state” under the Employee Retirement Income Security Act of 1984 (ERISA), USVI captives can provide employee benefits coverage, including life insurance, health insurance and annuities.

USVI captives are exempt from local insurance laws, including pooling and insolvency funds. There are no statutory ratio or solvency margin requirements and no restrictions on investments. In addition, captives are exempt from all USVI income and premium taxes.

An efficient regulatory environment is at hand, with a user friendly application process, a quick turnaround and accessible and experienced individuals in the public and private sectors.

The early 1980s saw Vermont begin to establish its reputation as the leading US captive domicile. Thanks to a variety of unique features and benefits, the Green Mountain State continues to thrive and can count itself among the top four largest domiciles in the world.

As of 11/1/99, 334 captives call Vermont home, broken down as follows: 16 are association; 20 industrial insured; 257 pure; and 41 risk retention groups.In terms of coverage, all property/casualty lines and workers' compensation are allowed while some life and health lines are permitted. Personal lines are not permitted on a direct basis.

If you ask Vermont captive owners why they chose the domicile, many point to the flexible, service-oriented regulatory approach and the extensive support structure of captive related firms.

Leonard D. Crouse, Director of Captive Insurance, highlights the regulatory factor when asked what sets Vermont apart from its competitors. “The Vermont Captive Section is the only insurance department onshore with a staff solely dedicated to captive insurance business. Currently the staff is made up of 13 employees.”

Other advantages include:
• A seasoned infrastructure of captive managers, legal, accounting and banking services augmented by the Vermont Insurance Institute and the Vermont Captive Insurance Association.
• Regulation that sets the standard in the captive industry.
• A highly competitive and responsive tax structure.

Vermont premium tax rates
Direct premiums Rates (%)
Millions of dollars
0-20 .4
20-40 .3
40-60 .2
60+ .075
Assumed premiums Rates (%)
Millions of dollars
0-20 0.225
20-40 0.150
40-60 0.050
60+ 0.025