Magazine article Risk Management

Captives in Paradise

Magazine article Risk Management

Captives in Paradise

Article excerpt

IF GEOGRAPHY IS DESTINY, then Hawaii is well situated to become a thriving captive domicile. The state's time zone--which allows one to do business with Tokyo and New York in the same day--is just one of the reasons Hawaii is attractive to potential captives. In addition, Hawaii also is a major tourist destination, with thousands of hotel rooms and hundreds of daily flights in and out of Honolulu International Airport. The state's temperate climate and "Aloha" spirit also make Hawaii a welcome destination for directors and risk managers. Although technically "onshore" as part of the United States, Hawaii's ambience more closely resembles that of offshore domiciles like Bermuda or the Cayman Islands. "People from all over the world feel comfortable here," says Sherman Hee, a Honolulu lawyer who promotes captive formation in Hawaii.

But Hawaii's captive law is as appealing as its pristine beaches. There is a premium tax rate of .25 percent for single-parent captives that is lower than the rates of Vermont and Colorado; association captives and risk retention groups pay 1 percent. In addition, because the premium taxes apply only to those premiums that have not been paid, a Hawaii captive would not be subject to Hawaiian tax because the fronting carrier would have previously paid taxes on the premium.

However, according to once captive manager, who wanted to remain anonymous, Hawaii probably had no choice but to undersell other domiciles on premium taxes because "people from the East Coast or Midwest are not going to go all the way to Hawaii unless it is tons cheaper." Nevertheless, Hawaii's growth as a captive domicile has been impressive. The state boasted 20 captives in 1991, up from 14 in 1990.

"Economic forces in the next 25 years will be focused in the Pacific Rim area, including California," says Mr. Hee. Wilfred Zuckeran, insurance program specialist for the Insurance Division of the Hawaii Department of Commerce and Consumer Affairs, notes that last year's captive formations include Nissan Motor Casualty Insurance Corp., whose parent is a U.S. subsidiary of Nissan Motor Corp. of Japan, and Marriott Corp. Hawaii also landed New Zealand's Teleco Insurance Inc., and has received inquiries from other companies based in the Far East.

Hawaii is encouraging captives to provide 24-hour coverage to their insureds, says Johnson & Higgins Vice President Craig Watanabe. The state permits captives to write group health insurance and other employee benefit coverages that are not encouraged in Vermont or Colorado, he says. In addition, Hawaiian companies may insure workers' compensation risks directly through a captive without a fronting insurer.

Hawaii's regulators have received high marks for integrity. "Our commission is fairly strict," says Mr. hee. "They make you behave like an insurance company. In the long run, that is good. You know that if you pass muster, you have a sound basis to do what you are doing."

The state's application package, for example, is about 34 pages in length. In addition, the insurance department uses outside consultants to review applications and make recommendations.

But Arthur Koritzinsky, a senior vice president at Johnson & Higgins Co., contends that it is not the conservatism of Hawaii's regulators that has fueled captive growth, but rather their flexibility. …

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