The North American captive market continues to grow although the wide gap between the large players and the small remains, as this domicile report by Lee Coppack and Valerie Denney highlights.

In the face of over-capitalisation in the commercial insurance market, captive growth was uneven during 1999 with many of the smaller domiciles seeing little change in the number of companies registered. Some may be vulnerable to pressures from the Organisation of Economic Co-operation and Development (OECD) if their names appear on the list of harmful tax jurisdictions which will be presented to the ministers of member countries at the OECD's annual council meeting in June. Any without effective anti-money laundering legislation and procedures are also likely to be regarded in an unfavourable light. Nevertheless, captive business remains good business. Its attractions are such that an article in the autumn of 1999 in the CPCU Journal in the United States asks whether an American Indian Reservation located within the continental United States could serve effectively as an offshore captive domicile. The article by Dr Richard Rudolph, an independent risk management consultant in Illinois, and Chicago insurance lawyer Eric Routman, suggests that there are a number of factors which make the American Indian Reservation or Nation suitable as an offshore captive domicile. Their argument is that the lack of existing corporate or insurance regulation on American Indian reservations would be attractive to potential sponsors while the revenue flowing from the captives in fees, taxes and salaries would be attractive to the hosts.Here is our journey round the domiciles:

Bahamas
The Bahamas are an established captive domicile which in recent years has not aggressively pursued new business. Two new captives were added in 1998 and another two in 1999 to bring the total licensed to date to 25. Just under half the captive parents are based in the United States, but the Bahamas can also boast two with Hong Kong parents (the Hang Seng Bank captive which writes connected business and the Malayan Group of Insurance Companies captive which writes finite (re)insurance.) There are two Russian owned captives, the Guta Group's, Guta Insurance Company, and the Russian Investment Company Ltd., owned by the Russian State Investment Corp., both of which write third party business. Norwegian Cruise Line, a Liberian registered shipping company, writes connected business through its Bahamas captive.

Barbados
Barbados is one of the largest domiciles with approximately 215 captives in 1999. Growth in numbers last year was gradual rather than spectacular, according to Kevin Walton, president of the Barbados Exempt Insurance Management Association (BEIMA) and vice-president of Marsh Management Services on the island. However, he says that the flow of premium through established captives shows no diminution and some clients have been putting more business through their captives, for example, to insure more innovative types of business such as environmental impairment and general liability. Although the commercial market is generally soft, Mr Walton explains that companies may still perceive that insurers are not sufficiently responsive to the quality of the individual risk. The result can be more business for the captive.

He also says that rather than write comparatively large amounts of third party business through their captive, a number of companies have set up reinsurance companies which write related party business or speciality lines where they have particular understanding of the market. Perhaps 12 or 13 are writing a broad book of business.

As a captive domicile, Barbados is best known for its links with Canada, and in 1998 the government of Barbados amended the Exempt Insurance Act (EIA) to help Canadian sponsors by confirming their Barbados residence. The EIA deals exclusively with companies insuring risks and receiving premiums from outside Barbados and for Canadian companies. Canadian companies get beneficial tax treatment for risks from outside Canada underwritten through the captive, so much of the business they put through their Barbados captives is located in the United States.

Tax treaties signed between Barbados and the United States in 1983 and with Canada in 1985 had enabled US and Canadian investors to repatriate some captive profits from Barbados tax free. However, both US and Canadian tax authorities removed the tax free profit repatriation provisions which resulted in considerable uncertainty, particularly in terms of the domicile's future attraction to Canadian owners, which the EIA amendments were intended to relieve. A new tax treaty between Barbados and Canada is still under discussion between the two countries. One premptive action taken by the Bajan government has been to extend tax treaties as widely as possible.

Protected cell and segregated portfolio legislation is under consideration for this year, and the government has allocated $500,000 for the promotion of the Barbados international insurance industry, so it is not surprising that Mr Walton describes himself as optimistic about the domicile's prospects.

British Columbia
The number of captives registered in British Columbia, Canada's principal onshore captive domicile, remained steady at 16 during 1999. Captives in BC are generally restricted to writing risks associated with their parent company or its affiliates, including its directors, officers and employees. Excluded lines are individual life, accident and sickness, non-reinsurance surety business and non-fleet motor vehicle.

The legislative committee of the British Columbia Captive Insurance Association has identified employee benefits as a class of business that could provide significant benefits to captive owners. It is currently working with the regulator to see how this type of business fits within the current regulatory framework in the province. At the present time, no BC captives write this class of business.

However, even though there is little change in BC, Bill Morgan of Aon and Kevin Day, of RISKebiz Internet Services, say they remain optimistic about the potential for captive growth in the province, which they are working hard to realise. They suggest if anyone would like to learn more about the captive opportunities in BC, the best way is to join the BC Captive Insurance Association, located at www.bccia.com.

Colorado
Colorado is home to 12 captives, eight pure and four group. The first captive, Havican Insurance, was licensed in 1976 and remains active.Property/casualty lines are permitted, but no individual coverages. The minimum capitalisation requirement for both single parent and group captives is $500,000, although the commissioner retains discretion to set individual capital and surplus requirements based on the plan of operation and the results of the captive.According to a spokesperson for the domicile, there is no noticeable trend in terms of the corporations attracted and the captive vehicles which have been set up. No legislative changes are currently planned.

Delaware
Delaware may be known as America's corporate capital, but its status as a captive centre is rather more low key. With applicable legislation dating back to 1984 (including 1990 amendments), six captives are currently licensed, writing property/casualty, surety, marine and transportation, and reinsurance. Required capitalisation is as follows: pure - $250,000; association (stock and mutual) - $750,000; industrial insured (stock and mutual) - $500,000.With competition fierce between captive locations, Delaware does not appear to be making much of a mark. There was talk a year ago about planned changes to the state's captive law, but this has failed to materialise.

Georgia
Although the domicile allows various forms of captive, the association variety remains the most popular here. Of the 15 licensed captives, most come under the association category. Which makes sense considering the modest initial fees, uniform capitalisation requirements ($500,000 for pure, association and industrial insureds) and fairly non-restrictive regulatory environment. All property/casualty coverages are permitted while any reinsurance business needs to be accredited.

Georgia is another captive contender which has failed to make a notable impact.

Illinois
Illinois boasts several unique features in its regulatory environment for captives and risk retention groups. As a well respected regulatory jurisdiction and a mature financial centre, captives and risk retention groups have an excellent base to work from. At present, however, a mere eight captives call Illinois home.Three types of captive are permitted: pure, association and industrial insured. Illinois captives may transact nearly all lines of insurance business. As is the case with most jurisdictions, life, accident and health, personal auto, homeowners' liability and workers' compensation are prohibited. However, it is possible to provide stop-loss (re)insurance of a single employer self-funded employee disability plan or an employee welfare plan. In addition, Illinois captives may reinsure employers' liability risks.

A particular facet Illinois likes to highlight is its redomiciliation facility. As pointed out in the domicile's marketing literature: “Illinois offers both onshore and offshore captives the ability to easily redomesticate to Illinois. Any domestic, foreign or alien company may reorganise as a captive insurance company or a commercial insurer under Illinois law. Any company that takes advantage of the relatively simple procedure delineated in the Illinois insurance code is treated as the same legal corporation that was in existence prior to the redomestication... In addition, all contracts and franchises of the company survive the redomestication.”Illinois has also made its reinsurance laws more responsive to captives in recent years.

Maine
Maine opened for captive business in June 1997. So far, the domicile has only attracted one captive. Owned by Bank One of Ohio, it reinsures private mortgage insurance on mortgage loans through the bank.

It is a slow start, but the advantages are undoubtedly there, such as .375 of 1% on the first $20 million of direct premium, low start-up costs and annual fees ($100), and a positive regulatory environment.

Maine captives can write all property/casualty lines (except personal auto and homeowners) as well as credit life and health, marine, surety and title insurance. In addition to the risks of parent and affiliated companies, Maine captives may also insure the risks of other companies with which the parent or affiliates have a contractual relationship.

Required capitalisation is identical to Vermont's: pure - $250,000; association - $750,000; industrial insured/RRG - $500,000.

When asked about anticipated future development, a spokesperson for the domicile comments that rent-a-captives will possibly be considered.

Netherlands Antilles
The Netherlands Antilles is an exceptional domicile with its geographical position off the coast of South America and Dutch heritage and links, but its slow development despite the enthusiasm of the Captive Insurance Association (Curaçao) shows how hard it is for smaller domiciles to grow against a competitive commercial market. In 1999, two new captives were added to the register - but three were removed. At the end of the year the total number of registered captives was 15.

The numbers may be modest but among the parent companies are groups such as Ikea, Pirelli, Kingfisher and Nedlloyd. Nine of the sponsors are Dutch companies, two Swiss, two Danish (one life and one non-life), and one each from Italy and the United Kingdom. As a result, Europe remains the main marketing target for the Netherlands Antilles. Owners come from a variety of sectors: five from transport and travel, four from wholesale and retail, and three from manufacturing and three from other, unspecified industries.

The main classes of business being underwritten are given as property, marine and transit and liability, plus travel, valuables and credit risks. The Ikea Group has also established a life captive, Dutch Nordic Life Insurance Company.

New York
Like Maine, New York may be a newcomer to the captive industry but it enjoys a well developed insurance infrastructure.

To date, two captives have set up on New York turf. The state offers a variety of locations, from New York City to various upstate locations that offer cost effective office and telecommunication resources.

Companies with a net worth of at least $100 million are able to form either a single parent or group captive. Most property/casualty lines are allowed, excluding title, mortgage guarantee and financial guarantee insurance. Financial responsibility coverages can be written via assumed reinsurance while excess or direct indemnity programmes for these coverages may be done on a direct basis. Also permitted is third party business via assumed reinsurance, with the approval of the superintendent.

In terms of capitalisation, $250,000 is required for pure captives and $500,000 for group captives.The benefits of setting up in New York are many, including competitive tax and assessment rates, minimal investment restrictions, and no rate and policy form requirements.

Panama
There are only about 50 captives with Latin American parent companies, according to the August 1999 edition of Captive Insurance Company Reports but that is one of the main attractions to many captive domiciles who see countries like Brazil, Argentina, Venezuela and Mexico as areas of great potential. As the only Spanish speaking domicile, Panama believes it should be at the top of the list for domicile shoppers from Latin America. Paradoxically, according to CICR, there are more Latin American captives with Panamanian ownership (16) than any other. Today, however, Bermuda is home to about half the Latin American captives, followed by the Cayman Islands with 14.

The country passed a stand alone captive law in 1996, and in June 1999 a group of captive enthusiasts, led by manager Stavros Costarangos, organised the first ever conference in Latin America dedicated to captive insurance. It drew around 150 people of whom about a third came from outside Panama. By mid-1999, two captives had been licensed but there were expressions of interest from others.

The captive law restricts captive activities to foreign risks and expressly exempts them from tax liabilities. which may make it an interesting study for the OECD, but unlike some other no-tax domiciles, it is not in the orbit of an OECD member.

Comments CICR: “There are supposed to be many captive candidates in Latin America, and a Spanish speaking domicile should be attractive to them, as was Luxembourg to the French and German speaking owners.”

A great boost to the country's national confidence took place when the US government handed back the Panama Canal to local control. At noon on 31 December 1999, the canal, opened by the United States in 1914, officially passed into Panamanian ownership. Panama is also home to one of the world's largest ship registries.

Rhode Island
This small state is not the most aggressive of captive contenders. At the last enquiry, no captives were licensed. All lines of property/casualty may be written, while personal lines and health and life insurance are not allowed.

The capitalisation requirement is as follows: pure - $250,000; association - $750,000; industrial insureds/RRGs - $500,000.

There is no minimum premium for pure and association captives, however a minimum aggregate annual premium of at least $25,000 is required for industrial insureds.

It remains to be seen whether Rhode Island has a future as a captive domicile.

South Dakota
South Dakota's Insurance Code dates back to 1996, but so far there is no sign of any captive success. The domicile only accepts pure captives, unique in the US captive industry. In terms of permitted business, there are no restrictions, although captives may only insure risks of the parent or affiliated companies.As far as capitalisation is concerned, the statutory minimum is set at $200,000. While there is no minimum premium, the premium tax rate is 0.25% on all risks not otherwise taxed, with a minimum tax of $5,000.

Tennessee
Although Tennessee has had captive insurance legislation in place since 1978, the figures are not what major captive centres are made of. At the last count, nine captives were registered. Permitted business includes professional liability, CGL, E&O, workers' compensation, casualty lines and reinsurance. No personal lines or employee benefits are allowed.

The capitalisation requirement pans out as follows: pure - $750,000; association, mutual and industrial insureds - $1 million.If Tennessee wants to improve its captive profile, it will have to become much more pro-active.

Turks and Caicos Islands
Figures for 1999 registrations in the Turks and Caicos Islands were awaited as we went to press. TCI has a new insurance superintendent, Harold Wong, who replaced Colin Holder during 1999. In 1998, there was 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 (re)insurance, underwritten by what are technically described as restricted market reinsurance companies (RMRC). Over 1500 such companies are registered in the TCI, making it the biggest domicile of this type.

The TCI office of PricewaterhouseCoopers explains that RMRCs are owned by a producer of insurance business for a direct writer which is regulated in its domestic market. The direct writer then reinsures a portion of the business with the RMRC, so the producer can participate in the underwriting. The insurance regulators in the TCI have tailored the insurance regulations to accommodate and attract this type of reinsurance company, including low capitalisation and relief from audit requirements. Nor do RMRCs have to produce an annual solvency certificate or have a local manager. The following types of insurance have been found appropriate for RMRCs:
• Life and/or accident and health required for someone seeking finance or credit
• Mortgage insurance
• Extended warranty coverage.
Of the conventional captive insurers, the vast majority have sponsors are of North American origin. By industry sector, they include marine related, services warranty and employee benefit enterprises. Workers' compensation and employee benefits are among the most important classes of business written by TCI captives. About half are group captives.

United States Virgin Islands
The USVI has the protection of the US flag in addition to the benefits of the American court system, but is not subject to the US tax code. In short, it is an “onshore” domicile with offshore benefits. For all this, the USVI has failed to make a significant impact on the captive industry, with an estimated captive count of eight.

Single parent, association and industrial insured captives are permitted to write all lines except motor and homeowners. Thanks to its status as a “state” under the Employee Retirement Income Security Act of 1984 (ERISA), USVI captives are able to provide employee benefits coverage, including life and health business and annuities.

In terms of capitalisation, the following is required: pure (stock) - $120,000; industrial insured (stock and mutual) - $200,000; association (stock and mutual) - $320,000.

The domicile boasts an efficient regulatory environment and fairly well developed financial infrastructure.