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ARC:HOW TO ACHIEVE THE MOST BENEFITS FROM A CAPTIVE INSURER

Captive owners consider business plans, costs when choosing domiciles

Business models, costs seen as top factors in choosing a domicile

Captive Insurance Domiciles

Captive insurance company owners carefully consider domiciles based on their business plans and how the captive ultimately will be used.

While the Caribbean had more captives in 2012, the U.S. growth rate topped the Caribbean and other regions, according to Business Insurance research.

Offshore domiciles continue to attract organizations based on expertise.

But when U.S. organizations look to form captives, they typically domicile in the United States, where captive operating costs are less expensive overall, experts say.

Redomesticating a captive from an offshore domicile to onshore happens less often and can be time-consuming, with significant legal costs, experts say.

Alan Kubitz, manager of risk finance and captive operations at the American Automobile Association Northern California, Nevada & Utah in Emeryville, Calif., is currently looking to form a new U.S.-based captive for employee benefits-related coverages such as group life insurance and long-term disability.

AAA Northern California's current captive, Pacific Lighthouse Reinsurance Ltd., which was formed in 1998, is domiciled in Bermuda and allows only certain property/casualty coverages.

“Employee benefits programs, whether that's long-term disability or group life insurance — those can't be written offshore,” Mr. Kubitz said.

“In setting up a new one, we're very early in the process, but I think there's a clear determination that it should be U.S.-based instead of another offshore captive” because of “U.S. regulations not allowing some business to be written offshore,” he said.

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U.S. companies looking to form a new captive — unless there's a particular reason or advantage to form offshore — generally prefer domiciling onshore, said Brady Young, president and CEO of Strategic Risk Solutions Inc. in Atlanta.

For “new captives, if you're a for-profit company, the path of least resistance for most would be to form it onshore,” he said. “The path of least resistance for most not-for-profit captives is to form an offshore captive,” Mr. Young said, noting that nonprofit organizations often have more flexibility in the types of coverages they can write and how to operate their offshore captive.

Also, if the captive owner is “entrepreneurial” and wants to write third-party business, “it's easier, generally, to get that kind of captive set up and approved offshore than onshore, as long as the business plan is solid and well-supported,” he said.

Les Boughner, executive vice president and managing director of Willis Group Holdings P.L.C.'s captive practice for the Americas in Burlington, Vt., said many U.S. multinational organizations seek offshore domiciles to handle exposures located outside of the United States.

“If you're dealing with a pure U.S. company with only U.S. exposure, I'd be hard-pressed to really identify what those advantages would be” in forming an offshore captive, Mr. Boughner said.

Instead of competing with U.S. locations, offshore domiciles focus on making their domiciles attractive based on the particular expertise and the benefits they bring to captive owners, he said.

“Cayman (Islands), for instance, continues to have a dominant share of health care captives,” Mr. Boughner said.

“Fundamentally they can operate a much more successful captive offshore than they can onshore. So health care continues to go to Cayman. Cayman understands the business. There are advantages for them to do it. There doesn't seem to be any reason for that to change,” he said.

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Additionally, growth in Bermuda has been more of an evolution from traditional, commercial captives to special-purpose vehicles, catastrophe bonds and other types of structured financial arrangements, Mr. Boughner said.

Shelby Weldon, director of insurance, licensing and authorizations for the Bermuda Monetary Authority in Hamilton, said that along with the traditional captive market, Bermuda is looking to innovate and find new business opportunities.

“Bermuda goes beyond the simple "onshore/offshore' differentiation, which is key to staying competitive and provides opportunities to companies looking to form captives,” Mr. Weldon said.

The BMA in 2009 put together a framework for special-purpose insurers, which typically have been used for issuing cat bonds in the insurance-linked securities space, Mr. Weldon said, noting that that such arrangements provide another alternative risk transfer option.

Evanston, Ill.-based Northwestern University, the only captive domiciled in Illinois, has remained with its domicile because of its relationship with the state, said Christopher Johnson, the university's director of risk management.

The university's captive, Rubicon Insurance Co., formed in 1990, has not been courted by other domiciles; and its broker, Aon P.L.C., which is active in offshore domiciles, has not encouraged Northwestern University to change domiciles, Mr. Johnson said.

“We have such a good working relationship with (Illinois') department of insurance that we know that they understand what the purpose of the captive is. It's a funding mechanism, not an insurance company,” Mr. Johnson said.

“When they come out and do their audits, they do it in that spirit,” he said.

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