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HONOLULU-Captive growth is slow in Hawaii, with only four new captives added in 1996.

But the domicile remains appealing to West Coast companies.

By year's end, Hawaii had 49 licensed captives, which wrote $204.7 million in gross premiums, according to the state Insurance Division. In 1995, the state's 45 captives wrote $220.4 million in gross premiums.

Among other factors, Hawaii is probably getting passed over by some potential clients and their brokers merely because it still has relatively few captives, captive managers suspect. It has yet to develop the critical mass that has helped Vermont's growth snowball, they say.

Yet Hawaii continues to attract some large, innovative captives, and new legislation may add appeal.

In September, Santa Clara, Calif.-based National Semiconductor Corp. redomesticated most of its Bermuda captive operations to Hawaii. The company will use the captive in part to create a nationwide automobile insurance program for employees, said Eugene Kiernan, National Semiconductor's corporate director of risk management.

As envisioned, employees would purchase policies with minimum mandated coverage levels from commercial insurers in the states where they reside, Mr. Kiernan said. Then, the captive would help provide employees with additional auto coverage at a lower cost than conventional insurers.

The program will allow National Semiconductor to get more use out of its captive and will stimulate employee loyalty and productivity by providing them a vehicle to obtain low-cost insurance, Mr. Kiernan said. The company is also considering using the captive similarly to provide employees with homeowner coverage.

The company already uses its Hawaii captive for property, marine, trade disruption, reinsurance coverages and marine insurance for corporate customers.

The semiconductor company chose Hawaii for its captive operation in part because of the ease in reaching the domicile from California.

"Going to Bermuda is a three-day trip just for a one-day meeting because it takes two days to get there and come back," Mr. Kiernan said. "Hawaii can be almost an overnight trip, and the airfare to go to Hawaii is $400, where Bermuda can be $1,300."

Additionally, National Semiconductor eventually wants to provide employee benefits, such as life insurance, through the captive. That, among other things, would require it to have a domestic domicile, Mr. Kiernan said.

National Semiconductor uses M&M Insurance Management Services Inc. for captive management.

Risk managers with long-established captives in Honolulu also remain loyal to the domicile and recommend it to colleagues considering forming a new captive or redomesticating an existing one.

The state has a good regulatory environment and an Insurance Department that is focused and understands the business of creating a captive, said Dean A. Reynolds, director of risk management and human resources for Nissan North America Inc. in Torrance, Calif. The state also has the necessary infrastructure for captive growth, he maintains.

Nissan has two captives in Hawaii, and Mr. Reynolds is a director of the Hawaii Captive Insurance Council (BI, Feb. 26, 1996). He delivered his comments during a recent meeting of the Risk & Insurance Management Society Inc.'s Los Angeles chapter, where he was one of three risk managers with Hawaiian captives who discussed the domicile's attraction.

They extolled a desirable tax structure and the ease of reaching Hawaii from California. Beside the frequency of flights from the West Coast, time-zone changes mean time is wasted in reaching domiciles to the east, while traveling west stretches the business day.

Hawaii is "just a lot easier for people to get to from the West Coast," said T. Michael Shelton, assistant treasurer and director of risk management for Occidental Petroleum Corp. in Los Angeles.

Occidental redomesticated a captive from Bermuda to Hawaii a few years ago and chose the domicile partly because of its low premium tax structure, Mr. Shelton said.

The state's captive premium tax for pure captives is 0.25%.

Pam Rogers, director of corporate risk management for Nestle USA Inc. in Glendale, Calif., also praised the domicile's favorable tax structure.

When Nestle consolidated several risk management programs and departments in 1992, it created a captive the next year so that it could maintain one deductible for corporate insurance programs yet allow its operating units to have separate deductibles that fit their individual needs, she said.

Nestle uses its Hawaii-based captive, Meridian Pacific Insurance Co. Inc., for "buybacks" of its property and casualty retentions and to fund workers compensation losses, which account for more than 50% of the company's cost of risk, according to Ms. Rogers.

"We looked all around the world at different domiciles and narrowed it down to Bermuda and Hawaii," Ms. Rogers said. "I was quite surprised to find out that, both on an accelerated tax deduction basis and looking at non-accelerated tax deduction, Ha-waii still came out ahead financially in the analysis."

Location also was a factor.

"It's a long trip to get (to eastern domiciles) from here," Ms. Rogers said. "You waste a lot of time getting there, and we know we can get to Hawaii much more quickly when we need to. So geography was an issue for us."

Nestle uses M&M Insurance Services for management.

Despite the appreciation for the domicile, growth also was slower than industry supporters liked in 1996 as well as in 1995 when five captives were added.

Consolidation among brokers stunted potential growth in 1996, Hawaii captive observers said. Hawaii has relatively few smaller captive management companies, and some of the large alphabet brokers were distracted by the recent consolidations, they said.

Six captive management companies have offices in Hawaii, and three others manage captives there from offices outside Hawaii.

Cheap commercial insurance rates also distracted companies from seeking out alternatives, Hawaii captive managers said. This is especially the case with workers comp insurers in California offering guaranteed rates below expected loss costs, said Peter J. Lowe, senior vp of M&M Insurance Management Services Inc. in Honolulu.

One company won a $600,000 premium decrease at renewal from its incumbent insurer by having a captive approved by the Hawaii Insurance Division, a Honolulu captive manager said. When the insurer came through with the reduced rate, the company dropped its captive application and paid the manager a fee for its service.

Hawaii supporters are hoping newly enacted and proposed legislation will help spur growth.

Act 248, signed by Hawaii Governor Benjamin Cayetano in July, aims to attract more formations by liberalizing pure captives' ability to write "affiliate" business. Pure captives now can insure entities that share common risks and maintain a working relationship with the insurer. The previous law contained requirements of common ownership, control and management.

The Hawaii Captive Council also is backing legislation calling for the state to fund a captive administrator within the Insurance Division. Under H.B. 2202, the administrator would be dedicated only to captive regulation. Currently, insurance division personnel split their time, serving on a captive task force group while still performing other duties not related to captives.

"That will add some of the marketing and technical expertise necessary for the industry to grow in Hawaii," said Craig M. Wantanabe, president of the HCIC and director of captive operations for 50th State Risk Management Services Inc., an affiliate of AIG Insurance Management Services. It could also cut startup costs, because the state now sends applications to an independent reviewer.

"That's a little bit more cost you need to incur," Mr. Wantanabe said. "With a full-time position within the insurance division, you have more consistency in the review process. And if it does go out for a review, it will probably be very specific."

Yet the current arrangement also has its advantages, National Semiconductor's Mr. Kiernan said. Outsourcing the review process puts it in the hands of professionals who have a strong understanding of the insurance industry.

H.B. 2202 is supported by the Hawaii Insurance Division, said Gordon Nishiki, an insurance program specialist for the division. It has passed through the state's lower house and has gone to the senate, as have three other bills backed by the HCIC.

The organization also is seeking to allow reciprocal insurance groups to set up association or risk retention groups. The organization hopes H.B. 1189 would attract quasi-government groups and nonprofit organizations that now go to the Cayman Islands to form captives, said Marc J. Lapointe, managing director of Alexander Insurance Managers in Honolulu.

H.B. 1190 would liberalize a captives' ability to write credit life and credit disability insurance.

H.B. 1216 would give the insurance commissioner more latitude in overseeing association captives, including risk retention group operations. That bill would reverse a 1994 law promp-ted by concerns from the National Assn. of Insurance Commissioners.

Hawaii's recently appointed insurance commissioner, former legislator Rey Graulty, "is extremely supportive of our industry," said Mr. Lapointe.

According to the Insurance Division, other captives formed in Hawaii during 1996 were:

Centaur Insurance Co. Inc., formed by Emeryville, Calif.-based Chiron Corp. The pure captive writes casualty coverage for the biotech company and is managed by M&M Insurance Management Services.

Oceanic Insurance Inc., formed by Los Angeles-based Castle & Cooke Inc., a real estate developer and resort owner and operator. It writes surety insurance and is managed by Johnson & Higgins Services Inc.

Residential Insurance Co. Inc., a Risk Retention Group, whose members are building contractors. The captive writes homeowners warranty insurance in 45 states. It is managed by Hawaii Captive Insurance Management Inc.