On an aggregate basis, the United States (with its 50 individual states--many trying to now attract captive insurers) is the largest captive domicile country in the world. However, because each state has its own captive legislation, each should be evaluated independently as they are domiciles in their own right.
Also, there are approximately 35 other countries in the world with captive legislation. In order to discuss the value of these offshore domiciles, I think it is necessary to first provide a brief history on the two largest offshore domiciles in the world--Bermuda and the Cayman Islands.
Bermuda, the largest offshore captive domicile, established itself in the 1950s when U.S. companies needed it to create more capacity than the commercial marketplace had available. Companies also found they could reduce their net premium costs for property insurance and other tariff rated coverages, offer coverages that were not available in the commercial marketplace and enjoy the freedom of a regulatory environment that welcomed the captive structure.
In the 1970s, when litigation exploded and jury awards became increasingly more onerous, coverage availability for medical malpractice became more difficult to obtain. It was during this time that the Cayman Islands established itself as a captive domicile by accepting Harvard's medical-malpractice captive. The Cayman Islands has since become the largest domicile in the world for healthcare captives and the third largest captive domicile country in the world for total captives.
This brief history of the two largest offshore domiciles illustrates their value to the industry and explains their continuing significance for insurance companies. They have progressive legislation, sound legal systems, excellent captive industry infrastructures and, most importantly, a balanced regulatory regime that provides comfort to captive owners. In fact, some offshore domiciles like the Caymans have government/private industry consultative groups to discuss the impact of proposed legislative changes, thereby allowing private industry an opportunity to assess any potential detrimental effects to the industry.
Offshore domiciles provide value by supporting innovation. It was the offshore domiciles that passed legislation for segregated-cell companies well before any U.S. state domicile did. Offshore domiciles are also used for such innovative structures as catastrophe bonds and the financing vehicles called sidecars. Many insurance captive consultants favor offshores when recommending third-party risk coverages for captives due to their flexibility. It is offshore domiciles that allow coverages such as punitive damages to be underwritten.
Offshore domiciles also provide captive owners with the opportunity to operate in a more cost-effective environment. There are no premium taxes applicable based on the level of written premium in most offshore domiciles, but instead there are nominal annual government fixed fees.
Other operating costs include professional fees for various consultants to the captive (because most captives operate in a virtual environment without any direct employees), which may include an actuary, attorney, auditor, claims administrator, insurance consultant, insurance manager, investment manager and tax professional. The complement of consultants and the extent of their involvement in a captive will vary upon the structure of a captive, which will have a direct bearing on the operating costs.
Despite the increase in the number of U.S. states with captive legislation, the dominant offshore domiciles will continue to flourish. Their regulators and service providers are not complacent and work hard to be responsive to the needs of captive owners. They provide thoughtful and consistent regulatory oversight. These domiciles have built such a strong infrastructure, with an immense amount of intellectual talent, that they will continue to be as innovative in the future as they were in the past.
RON SULISZ is director, Strategic Risk Solutions (Cayman) Ltd.
November 1, 2007
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