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Domiciles tweak laws to increase appeal

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Domiciles worldwide in the past year focused on fine-tuning laws governing captives—to attract more business and to bolster standards of captive insurance regulation.

While there have been few major overhauls of captive laws recently, a few domiciles, notably the District of Columbia and Ireland, made fairly significant changes in 2006.

Elsewhere, moves to enhance corporate governance and tightening compliance measures for captives were common.

"Most of the domiciles are tweaking their statutes, rather than changing them," said Thomas M. Jones, a partner in Chicago with the law firm of McDermott Will & Emery L.L.P. Mr. Jones specializes in captive legal and tax issues.

The District of Columbia is a domicile currently "at the forefront of legislative change," with two significant captive bills now pending, said Mr. Jones. "They are seeking to get a competitive advantage by offering a broader array of options for structuring captives."

The first bill, known as the Captive Insurance Company Amendment Act of 2007, would increase the types of "inter-cell" transactions that protected cell captive participants can undertake while retaining the protections normally afforded by the facilities.

The effect of that bill, if enacted, would be to permit two different cell owners to provide each other with loans or share some risks, while remaining legally separate when facing liabilities, said Dana Sheppard, associate commissioner with the District of Columbia's Department of Insurance, Securities and Banking. Additionally, the measure would facilitate the transformation of cells into full-fledged captives and captives becoming cells, Mr. Sheppard said.

The second piece of legislation authorizes securitization transactions in hopes of encouraging the formation of so-called reinsurance "Triple X" captive facilities, which offer a way for life insurers to form reinsurance captives. Both bills were signed by Washington Mayor Adrian M. Fenty late last year and are awaiting approval by the U.S. Congress, which must sign off on such measures.

The Vermont's Department of Banking, Insurance, Securities and Health Care Administration is also in the process of drafting legislation to, among other things, facilitate captive involvement in securitization arrangements, according to Kevin Moriarty, assistant general counsel for the department in Montpelier.

Another onshore domicile trying to get a bigger share of the captive market is Montana, where regulators have drafted legislation to divert 10% of all captive premium taxes into a fund to be used by the state auditor's office—which acts as Montana's insurance and captive regulator—to market the domicile.

S.B. 161 would help Montana compete with other captive domiciles and bring Montana "to where we can finally get out and start promoting ourselves like Vermont and other states," said John Huth, captive insurance coordinator in the auditor's office in Helena. The Montana Captive Insurance Assn. has endorsed the legislation.

In South Carolina, state Sen. Gerald Malloy, D-Darlington County, introduced S.B. 0509 late last month. The legislation would allow captives domiciled in South Carolina to write primary workers compensation coverage.

Currently, South Carolina allows captives to write workers comp reinsurance or to cover the deductible on large-deductible workers comp plans, said a spokeswoman for the South Carolina Department of Insurance.

Other captive domiciles differ in their treatment of workers comp coverage. In Vermont, for example, captives cannot write direct coverage, but they can write excess workers comp policies, according to Mr. Moriarty. In contrast, Hawaii allows captives domiciled there to write direct coverage or reinsure workers comp policies.

European, offshore domiciles

In Europe, regulators in Ireland last year were the first out of the blocks to implement the European Union's reinsurance directive, which requires reinsurance captives to meet minimum guaranty fund requirements.

Under the new rules, Ireland-based reinsurance captives must adhere to a minimum guaranty fund of e1 million ($1.3 million) and meet solvency requirements tied to premiums and claims.

Regulators in Dublin—in light of an increasing shift to a risk-based regulatory approach under the E.U.'s coming Solvency II directive—are, however, easing some restrictions on certain direct-writing captives, which may eventually be applied to reinsurance captives as well.

"For lines that are deemed to be very low-risk, we are prepared to look at the required solvency margin there," said Andrew Mawdsley, co-deputy head of Ireland's Insurance Supervision Department.

Meanwhile, the Isle of Man is expected to pass legislation this year to allow the formation of incorporated cell companies. ICC's—the first one to write insurance was recently approved in Guernsey in February—are similar to protected cell companies, but offer added protection to member entities in the event a cell collapses.

Several domiciles have enhanced corporate governance and compliance regulations for captive insurers.

In Switzerland, a new directive issued by the Federal Office of Private Insurance that went into effect Jan. 1 requires insurers, including reinsurance captives, to create a system, if one is not in place, to ensure proper corporate governance procedures are followed. Under the new rule, insurers must outline processes for monitoring and assessing their exposures through a risk management program and internal controls.

The British Virgin Islands also has added directives to strengthen compliance for captives domiciled there.

"They want to insure that all the proper records and information are being kept on island by the managers," and have recently begun performing informal inspections of captive managers' offices to ensure this compliance, said Stuart Grayston, president of offshore operations in Bermuda for captive manager USA Risk Group, which manages more than 60 captives in the BVI.

"It might be overkill" for some of the smaller captive managers, said Mr. Grayston, but "we don't have any problem with it. It just adds a few dollars to our costs, but other than that, I think it's a good thing."

While the Cayman Islands did not make any specific changes to its captive statute, last year it conducted—for the first time in 25 years—a comprehensive review of the insurance law, according to the Cayman Islands Monetary Authority.

"We are really excited about the prospect of an all-encompassing new law," said Morag Nicol, deputy head of the insurance supervision division of the Cayman Islands Monetary Authority. "It will provide considerable transparency" and "provide further detail and clarity regarding what's expected" from companies in the domicile, she said.

Bermuda last year added provisions to its insurance law through the Insurance Amendment Act of 2006, but those changes have had little affect on the captive sector, according to the island's regulator, the Bermuda Monetary Authority, in a statement released last month.

"There are no real impacts on the Class 1, 2, and even 3 as far as legislative requirements are concernedÖ(regulators) are really concentrating on the Class 4s," or the large commercial sector, which has seen a boom in startup reinsurance companies, said USA Risk Group's Mr. Grayston.

At some point, however, Bermuda will need to work to improve regulation of segregated account companies, because current law requires regulation of a SAC overall, but not each of individual cells, said Philip A. Barnes, managing director of Aon Insurance Managers (Bermuda) Ltd. who is also president of the Bermuda Insurance Management Assn.

On a global scale, the International Assn. of Insurance Supervisors continues its review of international standards for supervision of captives, which it plans to distribute to insurance regulators around the world.

"The fact that the IAIS has engaged key captive jurisdictions to produce a captive guidance paper regarding captive supervisionÖis very encouraging," said Jeremy Cox, supervisor of insurance at the BMA, in a statement.

Roberto Ceniceros and Michael Bradford contributed to this report.