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As U.S. companies' international exposures grow, more are turning to captives to cover those risks.

Risk managers who want to establish comprehensive global insurance programs often are using their existing captives or forming captives to attain that goal, captive and risk managers report.

By consolidating international risks in captives, risk managers are able to more efficiently manage those risks, obtain wider coverage, cut premiums and reduce taxes, they say.

U.S. companies with captives in Dublin, Ireland, for example, are able to use their captives to cover risks directly throughout the European Union and eliminate the cost of using fronting insurers.

Companies increasingly are using their captives creatively to cover international exposures, said Roger C. Gillett, senior vp of J&H Marsh & McLennan Inc. in Bermuda.

In particular, U.S. companies can reduce their taxation costs by channeling their international risks into captives, he said.

"It doesn't necessarily shelter the profits from tax, but it makes the profits subject to U.S. taxation, which is lower than in many other countries," Mr. Gillett said.

A company can use its captive to write a wide range of international risks that normally might not be insured, he said.

For example, international product recall or foreign exchange risks might be handled in a tax-efficient manner through a captive, he said. "You use the captive as a consolidating vehicle."

While few captive owners are using the captives to cover non-traditional risks, some risk managers are beginning to break new ground, Mr. Gillett said.

Union Carbide Corp. uses its Bermuda captive to consolidate its international risks and manage them more efficiently, said Richard M. Inserra, assistant treasurer-risk management at the Danbury, Conn.-based chemical manufacturer.

For the past two years, Union Carbide has written a multiline single-aggregate coverage for most of its international property, boiler and machinery risks and liability risks through the captive, he said.

The local operations are allowed to select their own retention levels, and then the captive provides $5 million in coverage above the chosen retentions, Mr. Inserra said.

Excess coverage above the captive's limit then is purchased from the traditional insurance market, he said.

"I guess we could have tried to insure the whole program with an insurer, but generally they don't offer this type of coverage," Mr. Inserra said.

The use of the captive also simplifies the process, as many countries insist that local operations are covered under admitted policies, so fronting companies are used. By using a captive, the various different risks can be amalgamated before they are insured by the conventional market.

The combined aggregate so far has not led to any dilution in coverage for Union Carbide, Mr. Inserra said.

"It is rare for us to have a claim that even goes into this layer of coverage," he said.

The more efficient use of insurance capacity, through the combined aggregate approach and through the purchase of combined excess coverage, saves the company between $100,000 and $200,000 per year, Mr. Inserra said.

A few U.S. companies are beginning to use their captives to cover their international employee benefit programs, said Alan C. Cossar, executive director of Aon Insurance Managers (Bermuda) Ltd.

The captive can be used to help standardize the benefit packages and give the parent company some of the profits of the business, he said.

"You have to tailor the programs for local countries and conditions, but you can use an international carrier who is willing to reinsure a portion of it into a captive or structure it so that the captive receives an experience dividend," Mr. Cossar said.

However, for the program to be worthwhile, the captive owner needs more than 15,000 overseas employees, he said.

Another burgeoning area among international captive developments is the establishment of captives in Dublin.

Several U.S. companies have established captives in Dublin to cover their European risks, said Gary Cullen, director at Sedgwick Management Services (Ireland) Ltd.

Often the companies owning Dublin captives also have captives in other domiciles that cover the U.S. exposures.

The main advantage of having a captive in Dublin is the ability to take advantage of the European Union's Freedom of Services Directive, which allows captives there to insure risks directly throughout the European Union, Mr. Cullen said.

"They can write directly and issue their own policies, including manuscript policies, and they avoid fronting fees," he said.

Direct captives domiciled outside the European Union would have to pay a fronting insurer between 5% and 10% of any premium to issue the local policies, Mr. Cullen said.

"Often the fronting company wants to take part of the risk, and that could be another 5% to 10%, so you can get quite significant savings by setting up a captive in Dublin," he said.

Direct writing is not limited to E.U. exposures, Mr. Cullen said. Risks in other countries, such as Australia and Norway, where non-admitted insurers are permitted, also can be covered by the Dublin captives.

Many risk managers with direct-writing captives in Dublin were unwilling to comment on their captives' successes or failures.

However, one risk manager, who did not want to be identified, said his direct-writing captive provided significant savings to the parent company by removing the need for fronting insurers.

Also, the location in Dublin gives the captive easy access to large European reinsurers, he said.

"You could access those reinsurers from Bermuda or Vermont, but it is easier to do it from Europe, and they like programs that are European by origin," the risk manager said.

The company has operations in five European countries and has successfully issued its own policies in all of them, he said.

However, another risk manager who did not want to be identified said "wrinkles" still need to be ironed out before the cost savings outweigh some of the problems of direct writing from a captive in Dublin.

"Despite the regulations, we've heard that some countries in Europe still won't accept your certificates of insurance. . . .They'll probably get there in the end, but at the moment the cost savings are not worth the bother of dealing with that," he said.

Until he is more confident in the direct-writing system, the risk manager said he will use the Dublin captive only to reinsure the company's European exposures.

McDonald's Corp. is making conservative use of its Dublin captive, said Larry Long, vp-risk management at the Oak Brook, Ill.-based restaurant company.

In the future, it may use the captive as a direct writer, but currently the captive is used to reinsure fronted policies for McDonald's European exposures.

"If you can direct write, it cuts out some of the frictional costs and gives you more control over your insurance program, because there is one less party involved," he said.

However, it is not yet clear whether the theory of direct writing throughout the European Union is allowed in practice by all regulators there, Mr. Long said.

"It's nice to have the option of direct writing, but there are a lot of different items to look at before you do it," he said.