PHOENIX—Employers with captive insurance companies domiciled outside the United States will be able to set up branch captives in Arizona to fund employee benefit risks under legislation signed last week by Gov. Janet Napolitano.

The branch captive concept is appealing to employers that want to fund benefit risks through captives, but want to continue to sponsor captives outside the United States. U.S. Department of Labor rules stipulate that captives used to fund benefit risks of U.S. employees must, among other things, be licensed in a domestic state.

For example, when Sun Microsystems Inc. decided several years ago to fund employee benefit risks through a captive, it didn't have time to move its Bermuda-domiciled captive program to a U.S. captive domicile, said Suzanne Gallie, Sun's senior risk manager in its corporate risk management department in Broomfield, Colo.

Instead, it set up a Vermont branch of Solarius Indemnity Ltd. to reinsure life insurance policies written by AIG Life Insurance Co. Ltd., a unit of American International Group Inc.

Branch captives face fewer regulatory requirements than stand-alone captives. For example, under the new Arizona law, which takes effect in early September, a branch captive would not have to file separate financial reports.

"It is less expensive and less difficult, generally," for companies to form a branch captive than a new onshore captive, said Rod Morris, captive insurance administrator with the Arizona Department of Insurance in Phoenix.

To date, only a handful of companies, including Sun Microsystems, have set up branch captives to fund employee benefit risks.

But with more employers likely to fund employee benefit programs through captives, the change in Arizona's law will ensure that the state remains competitive with other domiciles, such as Hawaii and Vermont, that now permit funding of benefit risks through branch captives, according to Arizona captive experts.

Other provisions in the legislation include:

c Reducing the minimum capital and surplus a cell captive insurer must maintain to be licensed to $500,000 from $1 million.

c Making it clear that captives can directly insure commercial motor vehicle risks.

c Specifying that a captive must obtain written approval of captive regulators before implementing any material change in its plan of operations.

c Stipulating that captive information submitted to the state Insurance Department is confidential and generally cannot be released without the permission of the captive.

The changes come at a time of rapid captive growth in the state. Last year, Arizona licensed 23 captives to bring its year-end total to 74. That total makes it the fifth-largest captive domicile in the United States and one of the fastest growing. Arizona currently has 78 captives.

State captive experts attribute Arizona's rapid captive growth to factors that include an attractive law and an Insurance Department that is strongly supportive of captives.

For example, Arizona does not impose premium taxes on business written by captives, said Michael Mead, president of Sonora Captive Management L.L.C. in Scottsdale, Ariz.

"We have a friendly department that is pro-captive," added Michael Low, a senior partner with insurance regulatory law firm Low & Childers P.C. in Phoenix and a former director of the Arizona Department of Insurance.