In spite of the seemingly permanent soft market and the disruption caused by broker mega-mergers, approximately 300 new captives were formed worldwide last year. Corinne Ramming explains why.
Statistics from the 1998 Captive Insurance Company Directory1 contain almost 4,000 captives, continuing a 17 year long upward trend (see chart). Why are sponsors across the globe continuing to use these alternative financing vehicles in spite of intense competition from commercial companies and continuing challenges from tax authorities?
The main reason appears to be that in today's sophisticated business environment, managers like to have maximum control of their risks, customising coverages to fit their needs. They also like to control their investment income.
Approximately 1,107 or 30% of the 3,702 captives whose sponsors are known are of UK or European origin. This percentage is slightly up from last year and the year before. Observers of the captive scene report that interest in captives is heating up in southern European countries such as Spain, Italy, and Austria, but may be cooling down in northern European countries.
Where are European sponsors domiciling their captives? Some are staying right at home in their own countries. For example, L'Oreal's captive, formed in 1997, is onshore in France, rather than in Luxembourg or some other traditional captive domicile. The 1998 Captive Directory shows that Sweden, Europe's largest and most sophisticated domicile after the UK, has 35 onshore captives, 20 of which were formed in the past five years. The UK has 23 onshore UK-sponsored captives; Germany has 10. Although most of Europe's captives are registered in traditional captive-friendly domiciles, there is a long term trend for some of the largest organisations to stay onshore.
Traditional European domiciles with special legislation to attract captives most favoured by European parents are:
Domicile No. of Captives
Isle of Man 164
Other European domiciles with only a few captives as at year end 1997, but hoping to become stronger, are Gibraltar (nine captives) and Jersey (13 captives).
European sponsors do not only stay in Europe, however; many have been licensed in Bermuda and the Caribbean domiciles (Cayman, Barbados, and Curaçao).
How do European sponsors choose domiciles? In some cases a domicile may offer a specific advantage, such as the ability of an Irish based captive to write coverages direct throughout the European Union, or Luxembourg's equalisation reserves. But observation of domiciles' growth and/or decline over the years has shown that quality of regulation is the most valuable criterion for domicile success. Captive sponsors want regulators to be flexible, knowledgeable, accessible and responsive.
Reputation of the domicile is also important; any hint of political instability or volatility is a sure turn-off to captive owners.
The domicile's infrastructure, including both quantity and quality of service providers (underwriters, managers, bankers, lawyers, actuaries, accountants) ensures that the captive's business can be carried out expeditiously. Bermuda's extensive infrastructure has certainly influenced the decision of many European sponsors to form captives there, even though it is not a convenient location for most Europeans.
Continuous improvement of captive regulation is another hallmark of a quality domicile. A number of European domiciles have lowered their tax rates or offered various options of taxation. Last year, Guernsey was the first domicile to pass the legislation enabling the formation of cell captives.
Taxation, although not the driving reason for most captive formations, is still a significant consideration, especially when it comes to the repatriation of captive profits. Double-tax treaties and any other advantages that give one domicile the edge over others are always enhancements.
Sponsor origins: the numbers
Statistics in the 1998 Captive Insurance Company Directory show the following European countries and number of captive sponsors from each as follows:
Country of origin No. of captives
Countries with fewer than 10 captives are Greece (all related to the shipping industry) and Spain. Other countries, for example Romania and Portugal, have only one pioneering captive.
UK sponsors: 542 UK-sponsored captives are listed in the 1998 directory - by far the largest European sponsor group. (Compare this figure to the 2,132 US-sponsored captives.) Single-parent captives make up 87% of the UK figure and 13% are group captives.
UK captives began to be formed back in the 1950s and 1960s, and have multiplied rapidly in the last three decades. The most popular domiciles for UK sponsors are Guernsey (265), Isle of Man (128), and Bermuda (84). The rest are scattered among many domiciles, including Ireland and Cayman, which have nine UK-sponsored captives each.
Three UK sponsors have a captive in far-away Vermont: ICI, Bass and Zeneca. These sponsors all have multiple captives: ICI has three in Cayman and three onshore in the UK, Bass has two in Bermuda and one in Gibraltar, and Zeneca has one in Cayman.
Sweden: Swedish sponsors began forming captives in the 1970s. Sweden now has 107 single-parent captives and 13 group captives. Popular domiciles for Swedish owned captives are Bermuda (16 captives), Ireland (19 captives) and the traditionally popular Luxembourg (33 captives). There are 35 captives onshore, as mentioned above. A relatively new domicile is Switzerland, where Nordic Mutual manages nine Swedish captives.
France: More than 50% of the 70 French-owned captives in the directory are in Luxembourg, a popular domicile for French sponsors. There are seven French-sponsored captives in Bermuda, two of them owned by Schlumberger. Two of the five onshore French captives are sponsored by Rhone Poulanc Rorer, which also has captives in Bermuda and Luxembourg. Pechiney has captives in Luxembourg and Vermont. The only other French-sponsored captive in the US (also in Vermont) is sponsored by Framatome, which also has a captive onshore in France and another in Luxembourg.
Netherlands: Sixty Netherlands captives are spread among a variety of domiciles. A dozen of them are in Bermuda and another dozen are in Ireland. Nine are in Luxembourg, six are onshore, and seven are in Curaçao, where there are potential double-tax-treaty advantages for captives with the right structure. The rest are scattered from Barbados to Switzerland.
Switzerland: The fifth largest European sponsor group is Switzerland, with 45 captives. More than 50% of them are domiciled in Bermuda, for example the pharmaceutical captives (Ciba-Geigy, Hoffman-LaRoche), oil firms and a number of financial/bank-owned captives (Swiss Bank, Union Bank of Switzerland, Swiss Investment Ltd, Asea Brown Boveri, Credit Suisse).
Germany: Ten German household-name companies have established captives onshore in Germany, among them Lufthansa, Ford, Hoechst, BASF, Bayer, Siemens (which has a sister captive in Ireland) and Krupp. Ireland has been a popular domicile for German sponsors. We count 16 there, including auto manufacturers Porsche, two Volkswagen captives and three BMW captives. (Daimler Benz, however, put its captive in Luxembourg.)
Belgium: Most Belgian captives are in Ireland (16) or Luxembourg (12). The majority are reinsurance captives; only two of the Belgian captives in Ireland write direct (Ictus NV and DVV Verzekeringen NV). There are a sprinkling of Belgian captives in Bermuda and Guernsey. Two large ones in Bermuda are Petrofina's captive and Sabena's captive.
Norway: Norway's 28 captives mainly use Bermuda, Ireland and Luxembourg as domiciles. A half-dozen of these are shipowners' mutuals.
Finland: In Finland it is another kettle of fish; four are in Bermuda, four in Guernsey, two in Ireland, three in Isle of Man and eight are onshore in Finland. Nokia Finance has sister captives in Bermuda and Luxembourg.
Other European sponsors: Four of the Danish sponsored captives are onshore in Denmark; the rest are sprinkled among various domiciles (two in Bermuda, four in Cayman, and two, owned by the Ikea Group, are in Curaçao, where there is potential benefit from tax treaty arrangements).
Italian sponsors have begun to form captives in the past 10 years. Most of the 12 Italian captives in the directory are only a few years old. The majority are in Ireland. Two, including the Pirelli captive, are in Curaçao, and one new one, owned by a motorcycle distributor, is in Gibraltar.
Most of Russia's captives, many of which are shipping-related, are in the Isle of Man. The first ones were formed in 1991.
The outlook for 1998 - more
There will be more and more rent-a-captive and protected cell company activity, as the interest in these arrangements that was evident last year translates into more and more licenses for these group captive arrangements, and more domiciles scramble to pass enabling legislation. Guernsey, the first to pass such legislation, will have a leg up on the other domiciles. (The much publicised cell captives in South Africa and Gibraltar, Eurogard and Guardrisk, are structured through sophisticated shareholder agreements - "walls of words" - not through actual legislation. Therefore, some lawyers believe that these arrangements may not hold up in the event of a lawsuit.)
Bermuda has a way to structure segregated cells too, but it is more cumbersome and expensive than Guernsey's, involving application for a private act of parliament and a lot of legal work. Bermuda and Cayman are among the domiciles drafting segregated cell captive laws.
The attraction of the rent-a-captives and segregated cell arrangements is partly tax and partly regulatory, not to mention less expense in start-up fees. The disadvantages to participants are little or no control over the captive and potentially high expenses. In spite of these disadvantages, the 45 rent-a-captive entries in the 1998 directory (compared to 18 the previous year), show that there is plenty of interest. Perhaps the attraction of these vehicles in today's environment of extremely soft rates and tax challenges is that they offer an opportunity to participate to some extent in the alternative market, but without the cost and commitment required to set up a stand-alone captive.
Corinne Ramming is editor of the 1998 Captive Insurance Company Directory. Tel: (1) 203 326 5400; fax: (1) 203 326 5498.
1. All statistics in this article are drawn from the 1998 Captive Insurance Company Directory, published by Tillinghast-Towers Perrin. For information call (203) 326 5468.