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With good cheer, captive industry leaders and regulators will tell you that they are in a "friendly race" to attract captive insurance companies. And indeed, judging by the banter at trade shows, there's no reason to suspect much beyond a jostle of elbows, or a piquant remark across the trade show aisle.

Baloney. There's just way too much money at stake. Since when's anyone been friendly fighting for their share of almost $10 billion in net written premium?

"There seems to be more and more states getting into the captive business," says Jeff Kehler, program manger, Alternative Risk Transfer Services, with the South Carolina Department of Insurance. "Who knows, it may not be all that long before every state in the union has a captive law."

And here's the giveaway: "The thing is, though, unlike the better mousetrap, if you build it, it doesn't necessarily mean people will come," he says in the next breath. No, they won't.

That is why, despite the cheerful public statements, domiciles are looking for an edge, points of differentiation, and looking to score with a corporate risk manager searching for the best deal.

With more than two dozen states now with captive insurance laws on the books, and another handful either dusting off their dormant statutes or thinking about passing new ones, risk managers have more choices than they did five years ago.

It's no longer a question of deciding between the crisp foliage of the Vermont fall in the Northeast, or the lush hillsides and sun-streaked beaches of Hawaii way, way out West.

These traditional leaders have competition. South Carolina and Washington, D.C., have mounted aggressive campaigns to woo corporate risk managers who are looking to incorporate on the Eastern Seaboard. Kentucky, the Bluegrass State, likes captives too.

Out West, Arizona and Nevada are in the game. Even Montana is a captive domicile.

And not a moment too soon either. There's premium to be had, and plenty of it. In 2004, $9.2 billion in net premiums were written through U.S.- domiciled captives, up from $8.9 billion in net premiums a year earlier, according to A.M. Best. In 2000, U.S.-domiciled captives wrote $6.7 billion.

Where there's money, there's always a fight. The greater the sums, the nastier the rumble.

Gregory K. Myers, executive managing director of Beecher Carlson, the Atlanta-based insurance and risk management broker, calls the battle among the U.S. domiciles a "respectable competition."

Lately, the competition's been coming from the Southwest. "It is a friendly, respectable competition, but with the domiciles there's been much faster growth in Nevada and Arizona," he says. "On a percentage basis, there's more growth there."

Nevada reported 58 licensed captives last year, up from 39 in 2004, an increase of 48 percent. Arizona reported 53 licensed captives last year, also up from 39 in 2004, for an increase of 35 percent.

Good for those sunny locales. But that can't sit too well with Hawaii, which is the No. 2 U.S. domicile with 158 licensed captives and has earned a reputation for catering to construction-industry captives looking to insure home-building risks.

Not to worry, says Cliff King, chief administrator of captive programs for the Department of Business and Industry in Nevada's Division of Insurance. "There's plenty of captives to go around."

True. But there's now plenty of domiciles to go around as well.

The top onshore domicile, Vermont, licensed 39 new captives last year, down 14 percent from 43 in 2004. Nobody expects Vermont, which wrote more than $12 billion in premium last year, to be dethroned from its perch anytime soon.

But even mighty Vermont, which is celebrating its 25th year since the passage of its captive insurance law in 1981, doesn't command the market share it once did.

The real action's among the second-tier players. They're all in the game with unique offerings, be they cultural, legal or financial.

TARGETING A NICHE

"As everyone has bellied up to the trough, you need a reason to come to A rather than come to B," says Pat Talley, chief financial analyst in the Financial Standards & Examination Division of the Kentucky Department of Insurance.

Kentucky has seven captives licensed. In 2005, the captives wrote $21.5 million in premium, up from $17.4 million in 2004. Not chump change, by any measure.

Culture, geography and the weather, which once dictated where company executives decided to form their captive, still hold sway today, according to consultant Andrew Barile.

But there are nuances from one domicile to the next. It may be too early to talk about niches in the proper sense of the term, but some domiciles have not been shy about exploiting their built-in advantages.

Washington, D.C., marketing itself to captives formed by trade associations, took advantage of the hundreds of lobbying organizations headquartered in the shadow of the federal government, for example.

"Pure captives are easy to regulate, but you have to find your niche," says Thomas E. Hampton, acting commissioner of the Washington, D.C., Department of Insurance, Securities and Banking. "Certain jurisdictions like us are trying to find their niche."

"For pure captives and more traditional captives, Vermont is just as strong as it's ever been," says Dana Sheppard, associate commissioner in the Risk Finance Bureau of the D.C. Department of Insurance, Securities and Banking. "But with smaller and association captives, Vermont's not so strong. Here's where there are new opportunities."

"D.C. seems to be making a specific attempt to appeal to risk retention groups, which is a liability captive," says Dennis Harwick, president of the Captive Insurance Companies Association. "So there's a bit of niche marketing for that particular thing."

Some other domiciles, like Colorado, haven't bothered to set up the regulatory infrastructure to attract serious captive insurance companies. But other states, Delaware and Connecticut, for example, could become powerhouses.

Delaware, because of its favorable tax laws, is already home to thousands of financial services companies, not to mention the chemical giant DuPont Co. Connecticut already has a built-in advantage because of the insurance giants headquartered there, says Harwick.

Even tiny Rhode Island has a captive, an insurance vehicle for Bank of America. The state, captive industry experts say, could specialize in providing insurance expertise for the financial services sector.

Vermont is, of course, still the favorite for companies looking for a state with the most developed regulatory infrastructure. Vermont stresses that repeatedly to prospective risk managers.

At a time when regulators are looking more closely at insurers and their brokers, a sound regulatory structure matters, according to Vermont captive insurance officials.

Perhaps. But states are getting more creative in tweaking their laws to encourage the formation of captive insurance vehicles.

"Some states are more lenient with regard to capital requirements," says Jeff Kenneson, vice president of business development for USA Risk Group, a firm that manages captive insurance companies.

Some states require a capital-to-surplus ratio of 5-to-1, others only a 3-to-1 ratio. Yet other domiciles are allowing agents to partake in the ownership structure rather than the insured, Kenneson also says.

There's some evidence that the financial structure may lure some companies to one state over the other. Arizona, for example, requires only a flat fee to get started. There's no premium tax. Captive insurance companies that don't write much premium are therefore more likely to take Arizona seriously as a potential domicile.

Some states have structured their laws to favor the creation of captives by companies based in those states.

Every onshore domicile has an angle. At CICA board meetings, Harwick says, colleagues have uttered the words "domicile proliferation," in reference to the number of states authorizing the creation of these specialized insurance companies.

Competition among the domiciles is by and large a healthy development, says Len Crouse, director of captive insurance with the Vermont Department of Banking, Insurance and Securities.

In truth, any state will welcome a captive, so long as it plays by the rules, experts say. "We'd love any captives we can get," admits Russell Coy 2nd, counsel for the Kentucky Insurance Department.

Captives help beef up a state's tax revenues, they belong to an industry that doesn't pollute, and they create a demand for professional services from lawyers and accountants.

By now, it's clear that when captives settle in a state, it's not by accident. It's because state officials have put their best foot forward. There's plenty of strategy that goes into every captive victory.

When Hawaii first authorized the creation of captives, the industry stalled, and it wasn't before the legislature set up an administrative department dedicated to licensing and regulating captives that the industry began to grow, says Myers.

"It doesn't happen on its own," he says. Colorado, one of the first states to enact captive legislation, has no captive industry to speak of.

CYRIL TUOHY is managing editor of Risk & Insurance®.

June 1, 2006

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