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New rules accepted by state insurance regulators may cause smaller companies to register captive insurance vehicles in offshore domiciles instead of onshore jurisdictions, according to captive insurance managers and state regulators. The rules are intended, however, to improve the financial reporting requirements and crack down in the wake of scandals.

The National Association of Insurance Commissioners voted in June to adopt revisions to its Model Regulation Requiring Annual Audited Financial Reports--the Model Audit Rules for short. The amendments are scheduled to go into effect January 1, 2010.

In addition, the rules mandate restrictions on auditing and bookkeeping services performed for companies.

The rules, however, may turn out to be too much of a good thing, warned one captive insurance manager.

"If I'm a private company, why do I want to deal with all these new rules that are going to cost me an arm and a leg when I can just go to Bermuda or Cayman and I don't have to deal with it?" said Gary Osborne, president of USA Risk Group, a company that manages captives and provides other alternative risk management services.

The corporate financial scandals of the past four years have caused a number of public companies looking to set up captive insurance companies to do so within U.S. borders because laws are considered stricter than abroad.

But Clifford King, chief administrator of captive programs for Nevada's Division of Insurance, said that the concerns of some captive insurance managers about the rules dampening onshore growth prospects were not misplaced.

The new rules, he said, will standardize laws with regard to captive insurance and leave the marketplace with fewer options. With restrictions placed on onshore domiciles, the offshore domiciles will become a de facto alternative for companies looking to set up a captive insurance company.

In particular, the amendments require that audit committees be part of insurance companies' internal framework.

Companies with $500 million or more in direct and assumed premium file a report to their state insurance commissioner testifying to internal control over financial reporting.

Insurance companies with less than $1 million in annual premium in a state, or less than 1,000 policyholders nationwide, are exempt, unless specifically required by a state commissioner.

About two dozen states nationwide have captive insurance laws on their books. Vermont leads the nation by far in the number of registered captive insurance companies, followed by domiciles such as Hawaii, South Carolina and Washington, D.C.

But Bermuda and the Cayman Islands are even more popular places to set up captive insurance companies.

Captive insurance companies act as an insurance hedge for corporations. When rates rise and corporations see insurance premiums increase, it's often cheaper for them to insure assets through captive insurance companies rather than through the standard market.

August 1, 2006

Copyright 2006© LRP Publications