Growing captives: More Japanese captives are forming in Hawaii, because it offers economic, legislative and cultural advantages. (Property/Casualty).

Hawaii now finds itself in a unique position to grow its market share of Japanese-owned captive insurance companies. Although the number of Japanese-owned captives is relatively small compared to the total market, Hawaii's Japanese formations is an emerging trend.

The state ranks 11th in the world for captive insurance companies and second in the United States. Almost 100 captive insurance companies have been licensed by Hawaii. Of these, four are owned by the U.S. operations of Japanese companies, and one is directly owned by a Japanese company for insuring Japanese risks. Three Japanese captives were formed in 2000 and 2001.

When considering a U.S. domicile, some Japanese companies have focused on gaining tax advantages. These companies stand to gain a tax savings for the difference between the Japanese corporate tax rate of about 40% (reduced from 50% within the past 18 months) and the U.S. federal tax rate of about 35%. Since Japan has a tax treaty with the United States, income that is taxed by the United States will not be taxed in Japan until dividends are repatriated to the parent.

In the past, Japanese firms used foreign domiciles, such as Bermuda, Ireland and Singapore, which have tax rates below 25%. Recent rate changes in Ireland and Singapore have caused those domiciles to become "tax havens" and are immediately taxed in Japan. Japanese companies are now re-examining their choice of captive domiciles.

Japanese companies are forming captives for the following reasons:

* Deregulation. The deregulation of Japan's insurance system in 1996 was an important event for the opening of the market for Japanese risk.

* Consumer sophistication. As new risks could be insured and alternative markets considered in addition to the traditional markets, Japanese buyers began to explore captive alternatives. The economic slowdown in the late 1990s contributed to the need to actively explore ways to control costs.

* Industry changes. Five major life companies and one nonlife company were declared insolvent in recent years. Large property/casualty companies have merged to gain economies of scale. As the market evolves, insurers are looking to boost profitability.

* New or unavailable coverages Early growth of the captive insurance market in the United States and Europe was fueled by need for coverages unavailable or cost prohibitive in the traditional market. Due to regulation of Japanese markets, some coverages could not be priced on traditional markets or were not quick to be developed.

Hawaii offers some unique advantages to Japanese owned captives.

Hawaii's captive legislation, signed into law on May 29, 1986, targets international business. In fact, branch-captive legislation, introduced in 1999, was partly in response to a request from a Japanese company Branch captives allow formation of a captive as a branch of another captive or insurance company, so the Hawaii captive need not be incorporated or separately capitalized. Many non-U.S. companies find this preferable to establishing another foreign corporation.

In May 2001, state legislators enacted additional legislation to allow leased captive facilities to operate as traditional rent-a-captives or segregated cells. The state has no premium tax on reinsurance assumed and a very low rate on direct premiums. Under Japanese laws, almost all Japanese risk would need to be fronted by a licensed insurer in Japan; therefore, no premium taxes would be assessed in Hawaii.

Then there's ease of access and the familiarity of Japanese business within the Aloha State. This comes from a combination of tourism, prior investment and Hawaii's concentration of Americans of Japanese and other Asian ancestries.

Unlike many new domiciles in the United States or elsewhere, Hawaii has a developed infrastructure of international banking, captive managers, international CPA firms, and lawyers specializing in captive formation. Hawaii currently has about 80 active captives with many big-name owners, such as Nike, Marriott and Nissan.

The competition for Asian markets is keen. Singapore already is a thriving domicile for Japanese captives. Guam, Labuan, Hong Kong and Australia are looking heavily to Asian markets for captive growth. While Hawaii has many international business facilities, there always is room for improvement in international banking and legal, taxation and consulting resources tailored to Asian markets.

Wanda Jong, vice president of Becher and Carlson, is president of the Hawaii Captive Insurance Council. Her comments were excerpted from her article in Tillinghast's Captive Insurance Company Reports, Copyright (c) American Reinsurance Co. Used with permission. She can be reached at [e-mail].