Southwest domiciles expand at rapid pace

More than 150 years after writer John Soule and newspaperman Horace Greeley advised America's young men to "go west," their advice is not lost on today's new captive insurer owners.

Boasting captive laws modeled after that of pre-eminent U.S. captive domicile Vermont, respected regulators, relatively easy accessibility and various vacation attractions, the 2006 captive growth rates of the newest domiciles in the United States—Arizona, Nevada and Utah—far exceeded Vermont's. Indeed, Nevada last year licensed nearly as many captives as Vermont, even though Vermont's captive base is roughly six times bigger than Nevada's.

While the three southwest domiciles share high growth rates, they are markedly different in other respects, captive managers and regulators note. For some captive owners, one or more of those differences and possibly their relatively recent emergence as domiciles could be the tipping point in their decisions about where to locate, captive managers say.

Combined, the 193 licensed and active captives in Nevada, Arizona and Utah at year-end 2006 amounted to about one-third of the 563 in Vermont. Nevada had the largest number of the trio—90—followed by Arizona with 73 and Utah with 30.

Captive regulators in the three Southwest domiciles acknowledge that they do not expect their respective jurisdictions to catch up—as measured by total number of active captives—with Vermont anytime soon.

But growth rate is another matter, they say. Vermont licensed 37 new captives last year for a growth rate of less than 10%. The growth rates in each of the three Southwest domiciles, however, approached or exceeded 50%, with Nevada licensing 35 new captives, Arizona 23 and Utah 16.

There is a spirit of competition among many of the regulators, though they characterize it as friendly and insist that a captive owner's decision on where to locate is far less important than the fact that captive owners have alternative risk financing options.

Regarding that spirit and the possible impact on Vermont's captive industry, Len Crouse, Vermont's deputy commissioner of insurance and its top captive regulator, said: "I'm not so concerned about numbers anymore. Our numbers are good."

Besides, he said, Vermont still attracts the largest captive owners.

The numbers are important in Nevada, however. Not only does Cliff King, chief administrator-captive programs in the state's Insurance Division in Carson City, promote the state's attractions as a captive domicile but so does Insurance Commissioner Alice A. Molasky-Arman, who meets with every prospective captive owner considering establishing a captive in the state.

"I enjoy it," Ms. Molasky-Arman said. Perhaps more importantly, the commissioner said she has a responsibility to understand who wants to set up a captive in Nevada.

Prospective captive owners love that attention, said Robert Vogel, vp of Carson City, Nev.-based captive manager Pro Group Captive Management Services Inc., a division of Pro Group Management Inc., the state's largest captive manager with 44 captives under management as of last month.

Meanwhile, the Insurance Division's efforts have caught the attention of the state's Economic Development Commission, which has joined the division and the Nevada Captive Insurance Assn. in promoting the state.

Arizona's top captive regulator, however, says the domicile is not competing with any other for captive business. The Arizona Insurance Department is "just fulfilling a need of consumers and the public," said Rod Morris, captive insurance administrator in Phoenix.

"Therefore, whether we approve new licenses is immaterial to us—other than it's nice to be considered a desirable domicile," said Mr. Morris, who previously held executive positions at the U.S. Overseas Private Investment Corp. and the CNA Risk Management Services unit of CNA Financial Corp.

Instead, the Phoenix-based Arizona Captive Insurance Assn. has taken the lead in promoting Arizona as a captive domicile, said Judie Harrington-Carlisle, executive director.

In Utah, Don Spann, the Insurance Department's first captive insurance director, credits captive growth in the state largely to the Salt Lake City-based Utah Captive Assn., captive managers and brokers.

Mr. Spann said he joined the Utah department last October after a 30-year tenure in the Tennessee Insurance Department because of the governor's, Legislature's and top insurance regulators' support for the captive industry.

For example, the state's 2003 captive law was modified in 2005 to eliminate the captive premium tax, Mr. Spann said.

That and the captive fee structure makes Utah one of the lowest-cost domiciles in the United States, said Jonathan S. Soules, a Salt Lake City-based vp with captive manager Marsh USA Risk & Insurance Services Inc. and president of the Utah Captive Assn.

Equally important as domicile alternatives for captive owners is proper and consistent regulation, captive managers and regulators say.

After all, "if something goes wrong, it'll reflect on everybody in the business," Mr. Crouse said.

Jon Harkavy, an Arlington, Va.-based vp and the general counsel for captive manager Risk Services L.L.C., which is an approved captive manager in all three Southwest domiciles, noted that both Colorado and Delaware were viewed as strong domiciles shortly after enacting their captive laws in 1972 and 1984, respectively. But regulator changes in both domiciles led to a waning commitment to captive growth, he said.

The regulators in both Nevada and Arizona are fair, straight- forward and predictable and recognize that traditional and captive insurers must be regulated differently, Mr. Harkavy said. Risk Services does not yet manage a captive in Utah.

Arizona's decision not to market itself, however, might raise questions among some captive owners about whether its current commitment to the captive industry will continue under a future commissioner, he said.

But Nancy Gray, the Burlington, Vt.-based executive director-North America for Aon Insurance Managers USA Inc., an Aon Corp. unit that manages 22 captives in Arizona, said the state "has demonstrated its commitment to the captive marketplace."

The Insurance Department's decision not to market the state "doesn't matter," Ms. Gray said. "What we're looking for is how they're going to regulate captives once they're there."

Mr. Morris says the Arizona Department's commitment is demonstrated by the fact that—counting traditional insurers— it regulates more insurance companies than any other major captive domicile. In doing so, the department handles all of its analysis functions in house, he noted.

Nevada's Insurance Division outsources many of those functions, but Pro Group's Mr. Vogel said that also can be an advantage to captive owners. "I like outside eyes, because they're not beholden to anyone," and outside experts often "will have a lot more expertise" in their field, he said.

Nevada's commitment to the captive industry is demonstrated by one captive law change and another that is in the works, both of which are designed to ease unnecessary financial burdens for captive owners, according to the state's regulators and captive managers (see related story).

Nevada also generally completes the licensing process for risk retention groups in 30 to 60 days, while most domiciles take three to six months, Aon Insurance's Ms. Gray said.

Meanwhile, Aon Insurance is looking at Utah to distinguish itself from both Nevada, the largest of the three domiciles, and Arizona, which like Utah, does not impose premium taxes on captives.

But Fred Turner, president of Irvine, Calif.-based Active Captive Management L.L.C., which operates captive manager Utah Captive Managers L.L.C. in Salt Lake City, said Utah has some advantages over Arizona. Utah Captive Managers has 20 captives under management in Utah and two more under development.

For example, he noted that Utah requires only three captive board directors, while Arizona law requires five.

Mr. Turner also said that while the Arizona Insurance Department responds quickly, he has encountered delays in dealing with that state's Corporation Commission, which also has to sign off on captive formation paperwork. The delays led one captive owner to select Utah over Arizona as its domicile, Mr. Turner said.

Arizona's Mr. Morris acknowledged that the Corporation Commission did get backlogged in late 2005 and early 2006, but he said that problem has since been rectified.

Ms. Gray said she has not encountered that problem. She also said that Arizona's board-member requirement is not an issue for any Aon Insurance client.

Overall, regulators in Arizona, Nevada and Utah and captive managers in the domiciles say they expect to see more captive owners stream into the Southwest in the future.

None of the domiciles will individually catch up with Vermont, Mr. Vogel predicted. "But when you look at all three, that might be possible as a region."