Capital flows into captive havens: Caribbean jurisdictions do not necessarily see themselves in competition with Bermuda but with the United States and Europe, where captive markets have been growing apace. U.S. jurisdictions now include 21 states and the District of Columbia

Risk & Insurance, Oct 1, 2004 by Roger Crombie

Although Bermuda is home to half of Latin America's captives, and most Caribbean jurisdictions have European and Japanese captives on their rosters, the major customers for all these jurisdictions are North American companies.

The Caribbean does not see itself, as a whole, in competition with Bermuda, but (odd though it sounds) with the U.S. and Europe.

U.S. A HOTBED

Twenty-one U.S. states, plus the District of Columbia, currently permit the use of captive insurance companies. Vermont has about 500 captives, Hawaii more than 100, and South Carolina has incorporated about 60. Texas and Iowa both have around 60 risk retention groups, a sort of "captive light" that is attracting growing interest in the United States. North of the U.S. border, British Columbia has attracted almost 20 captives.

In Europe, Guernsey (about 350) and Luxembourg (about 280) are the powerhouses of the European captive sector. Also growing fast are Ireland (at about 200) and the Isle of Man (about 180). Switzerland has about 40 captives; Denmark, Gibraltar, Jersey, Liechtenstein and Malta each have 20 or fewer.

Captives were slower to catch on in Europe for a variety of reasons. The American economy is larger, and its greater homogeneity allows good ideas to spread faster, for one thing. Cultural imperatives also apply. But captive use in Europe is probably increasing at a faster rate than that of the United States, having taken hold of the European risk managers' view of the world in the way that it attracted their U.S. counterparts.

In the Asia/Pacific region, Singapore, with about 60 captives, is the market leader. Vanuatu has about 20; Hong Kong, Labuan and Guam have about a dozen between them. In Africa, Mauritius has about 15 captives and the Seychelles had one, at last count. And in the Gulf, the idea of captives has suddenly caught on in Bahrain, the Gulfs vibrant business center, which has registered its first captive. Now Dubai has passed captive legislation.

Competition is rife in the captive industry. Rates of captive formation are not exactly anticyclical, but the need to start captive operations goes in waves, depending on the urgency of other matters. Captive insurance often sits below the radar when greater "affairs are at hand and comes to the fore when calm has been restored and hard markets ask for premiums that make operating a captive attractive.

Getting Your Benefits Captive Approved

Until recently, employers seeking to fund employee benefits plans through a captive insurance vehicle needed deep pockets and lots of time. The U.S. Department of Labor did not grant exemptions to funding ERISA benefit plans without a lengthy review of the plan design, the ability to pay claims and the true benefit to covered employees. Typically, a review of this nature and magnitude took one to two years.

However, following DOL's granting of two private rulings to Columbia Energy in 2000 end Archer Daniels Midland 2002, International Paper this year set a precedent for an expedited, 45-day "fast track" ruling on its employee benefits captive. Now that the element of timing has changed, many organizations see captives as viable long-term solutions for benefit plan funding.