By Cyril Tuohy
For the first time since U.S. laws went into effect creating the domestic captive insurance industry in the early 1970s, the number of onshore captives -- captives set up in the European Union or the United States -- now outnumber offshore captives, those set up in Bermuda, the Cayman Islands or other island sovereignties.
For the 10-year stretch from 2001 to 2011, onshore captives in the EU and in the United States made up 52 percent of all captives globally. Offshore captives made up 48 percent, according to the "2012 Captive Benchmarking Report" released by Marsh in April.
In the previous 10-year period, from 1991 to 2000, onshore domiciles comprised only 35 percent of the captive insurance market, compared with 65 percent for offshore domiciles, according to the report.
Citing interviews with regulators, Michael S. Cormier, CEO of Marsh Risk Solutions, said companies looking to set up shop in the United States have more opportunities now than they ever have in the past. The U.S. market is the most competitive onshore marketplace, Cormier said.
In the United States, Vermont is the No. 1 location, with 590 licensed captives at the end of last year, followed by Utah with 239 captives, according to industry statistics. In Europe, the tiny nation of Luxembourg is the No. 1 onshore destination, with 242 licensed captives at the end of 2011, followed by Dublin, with 101.
Offshore, Bermuda -- which practically gave birth to the captive insurance industry -- remains the world's No. 1 jurisdiction, with 862 licensed captives at the end of last year. The Cayman Islands are No. 2, with 707 licensed captives.
Captives serve as an in-house insurance company to a sponsoring corporation. Companies look to their captive when prices in the insurance marketplace harden, or rise. Captives can then insure the risk with a reinsurer. Industries most likely to use an onshore captive include public authorities, the education industry, entertainment and media companies, and mining and manufacturing companies,according to the Marsh report. Industries preferring offshore domiciles include marine cargo, health care, forestry and automotive companies.
entering the mainstream
Insurance experts said the reversal in the onshore-offshore percentages over the past decade is due to the industry becoming more "mainstream," and to a greater familiarity of captives among regulators and the corporations who use them.
Companies also have more choices onshore. In the United States, more than 30 states have captive laws on their books, said Arthur G. Koritzinsky, managing director of captive solutions for Marsh.
Some states have been more aggressive about promoting the industry. Colorado, which has had a captive law on the books for more than 30 years, hasn't bothered to build up its captive industry. By the end of last year, it was home to just five captives.
Other states, seeking to attract white-collar jobs and a steady stream of revenue for their treasuries, have nurtured a multimillion-dollar industry around captives, in market cycles hard and soft. Utah, which authorized captives in 2003, has 239 active captives.
"It's interesting that this has happened in a soft market," said Ross Elliott, director of the Captive Division of the Utah Insurance Department. More than 20 new captives are in the process of becoming licensed in Utah in the first six months of 2012, he said.
As the market turns, he's curious to see if even more captives are preparing to open their doors onshore, Elliott said.
Last year, New Jersey became the latest state to pass laws authorizing captives, licensing its first captive, Prudential New Jersey Captive Insurance Co.
Since signing captive legislation into law in February 2011, New Jersey has approved three other captive insurers, Ports Insurance Co. Inc., which covers longshore workers' comp and liability exposures, Sequoia Insurance Co., which covers medical liability for two hospitals, and Exchange Indemnity Co., a captive for telecommunications giant Verizon Communications Inc.
"This is what new business development looks like," said Ken Kobylowski, acting commissioner for the New Jersey Department of Banking and Insurance, in announcing the approval of Exchange Indemnity in May. "There are more companies with applications in the pipeline."
Tennessee last year also updated captive laws that had languished for years. The changes prompted Nashville-based hospital chain HCA Corp. to move its captive from Colorado to Tennessee to take advantage of premium tax savings.
Ohio is considering a captive law and could develop into an "emerging jurisdiction in the next year or two," said Koritzinsky, during a press conference in April to announce the survey's release.
Over the past 30 years, onshore jurisdictions have built a solid tax accounting and legal infrastructure to serve captives, Koritzinsky said, and a cottage industry of captive managers that stand ready to shepherd and nurture captives on behalf of the parent corporation.
As a result, European or U.S.-headquartered companies thinking of setting up new captives onshore -- even with new financial structures -- are more comfortable than they might have been 15 years ago.
And with most U.S.-based companies with offshore captives elected to be treated as a U.S. taxpayer anyway, the offshore advantage has practically become moot.
"Companies are taking a more conservative view," Koritzinsky said. "They are generating new captives in a home state to manage the tax rate. So we're going to see new growth in U.S. domiciles."
New captives set up by some of the nation's largest companies have opted to stay onshore. BP America Inc. last year created the captive Saturn Insurance Inc. in Vermont.
Kraft Foods Inc., Bank of America Corp., Catholic Relief Insurance Co. of America, Marathon Petroleum Corp. and Cummins Inc., a manufacturer and distributor of engines and related technologies, all also set up captives last year in the Green Mountain State.
Captive industry consultant Andrew Barile, founder of Andrew Barile Consulting Corp., said managers choosing between onshore or offshore domiciles need to consider the IRS's position on captives, and how much of a tax haven the captives provide in the eyes of the tax revenue agency.
Money set aside in reserve through the captive has, in some cases, ballooned into the tens of millions of dollars, allowing the parent company to take a corresponding deduction.
"When you're looking at major tax deductions, it's an issue," Barile said. "The more premium that the parent can put into the captive, the more money the captive has to pay back the claim, and the bigger the deduction."
Barile also said onshore regulators are often stringent about who can set up a captive, and that minimum capital requirements are often higher onshore than they are offshore. Indeed, onshore captives hold more capital relative to premium, the report found.
"Reinsurers have people looking to reinsure that risk and they look at the domiciles and they know the U.S. regulates the captives more strictly than, say, Turks & Caicos or St. Kitts and Nevis," Barile said.
The cost of travel domestically is cheaper for managers as well. Why spend $600 a night for a hotel room in Bermuda when you can travel to Tennessee and drop $89 a night for a room, he said.
State-based captive industry lobbyists are pushing hard for companies to set up a captive in their respective states, and state regulators, mindful of slow economic times, are looking for ways for states to be more welcoming of captives.
Companies located in the Americas own 67 percent of all onshore captives, and 73 percent of all offshore captives, the Marsh report found. Delaware last year said it is considering changes to its captive laws to make it easier and cheaper for companies to set up and run a captive there.
States like Utah and Kentucky, with their low-cost structures, offer competitive alternatives for middle-market captives.
Over the past 10 years, middle market companies have realized they, too, can participate in the captive industry, Elliott said.
Because of initiatives such as Delaware's, much of the onshore growth is expected to come from captives writing less than $2 million premium annually, which typically insure the risks of middle-market companies, Cormier said.
CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
July 24, 2012
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