By ANNE FREEDMAN, senior editor of Risk & Insurance®
It used to be, people said with tongue-in-cheek, that locating a captive domicile was based on a preference of either wanting to ski or play golf.
But that was when Vermont and Bermuda were among the few choices available, said Thomas F.X. Hodson, president of the Connecticut Captive Insurance Association.
Now, there are 31 states and 33 countries that are captive domiciles, according to the Captive Insurance Companies Association (CICA), which drew nearly 500 attendees to its annual international conference held March 10-12 at the Westin Mission Hills in Palm Springs, Calif.
"In light of the growth in the number of viable domiciles, where to place a captive hasbecome more a question of geography than whether you like to golf or you like to ski," Hodson chuckled.
When Dirk D. Heim, vice president of Sierra Land Group in Glendale, Calif., and a CICA board member, started a captive 12 years ago, he said his "feeling was it was kind of a new thing. Now, the majority of the states offer them."
The Nonadmitted and Reinsurance Reform Act, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is playing a role in that, said Jeffrey S. Kenneson, senior vice president, business development, USA Risk Group in Burlington, Vt.
That's because the NRRA "has put a renewed spotlight" on self-procurement taxes -- which have been around for a long time -- as a way of increasing the revenues to that state, he said.
In addition to home state taxes required by the NRRA, a captive would be taxed by the state in which they are domiciled, he said, so some companies may consider locating their captive in their home state as a way to reduce the tax burden.
But, his colleague, Jonathan Arbeit, vice president at USA Risk Group West, said: "It's caused a lot of states to get into it really quickly and some are getting in over their heads. Commercial insurance regulators don't necessarily understand how to regulate captive insurers."
"It's somewhat counterintuitive," said Dennis Harwick, president of CICA, "but the No. 1 thing companies want is experienced regulators. They want the certainty that [the state] knows what a captive is, and that they know how it's operated."
Companies are also looking for captive domiciles that offer all of the support services necessary, such as actuarial and law firms, and claims management and captive management organizations that are expert in the industry.
Heim notes: "They don't want to build that infrastructure on their own."
"There are so many domiciles now," said David Fox, director of information services for the Bermuda Insurance Development Council. "It wasn't so long ago that it was us and a few others, but now there has been a lot of growth, from individual U.S. states and several other U.S. jurisdictions and territories.?
Some domiciles, however, don't have the necessary expertise, agreed a corporate risk manager who didn't wish to be identified.
"It's people coming to the party a little late and a little short," said the manager, whose captive is domiciled in Bermuda.
Still, said Shanna D. R. Lespere, director of international affairs for the Bermuda Monetary Authority, competition "probably ups everybody's game. But, you have to be confident in your own regulatory regime that you put in place.
"We recognize there is competition, but in the same token, for us, it's more important that we have mutual cooperation and recognition of each other so that we can globally supervise that [captive] company," she said.
John C. Thomson, insurance program manager, captive insurance, State of Connecticut Insurance Department, agreed.
Competition, he said, "really strengthens the whole approach to using captives. It also forces domiciles to keep their game up or they are not going to succeed."
The increase in competition coincides with an increased interest in captives from some small and mid-size companies (SMEs) as they investigate the best way to manage employee health benefits risks following health care reform.
For captives of SMEs, Kenneson said, "it can make sense to go to whatever region of the country you are in." But for larger, more complex captives, a more established domicile will likely be preferable, he said.
A few states, he said, passed enabling legislation only to attract the large company headquartered in their state and seem uninterested in establishing a robust captive sector.
"I have gone to a few state regulators and they have basically said, 'We are really not open for business for anyone outside the state.' In that regard, it's not good because they are doing it for that one company," he said. "They are not doing it for the industry. It's not really competition."
March 19, 2013
Copyright 2013© LRP Publications