Tax Breaks Fade as Incentive To Form European Captives.

Growth of captive insurance companies in Europe is now being driven by nontax efficiencies, the head of one captive manager said. "If the focus of a captive is tax, the focus should be changed," said Christopher Johnson, director of Gibraltar-based European Insurance Management Services.

"European tax harmonization is undoubtedly a threat to those captives whose raison d'etre was purely tax," he said. "However, many owners have been taking a long, hard look at their captives and are talking action--which may, of course, mean closure." But Johnson, speaking at January's IBC European Captives Convention in London, was bullish on the future of the alternative-market facilities. "Captives and the reasons for forming them may be changing, but they are definitely here to stay."

The word captive has become a broad term used to describe a variety of self-insurance arrangements, including newer innovations, such as customer insurers, warranty insurers, cell captives and special-purpose vehicles formed for the benefit of their noninsurance owners. These expanded roles of captives are leading their growth, he said.

An EIMS survey shows a 4.5% increase in the number of European captives in the leading domiciles in 1999, with all but the Isle of Man enjoying a net increase. The research counts each active cell of protected-cell companies as an individual captive, providing a truer reflection of comparative growth and the number of companies retaining risk in each jurisdiction.

Protected-cell companies isolate the capital, reserves and claims of several companies into "cells," which for regulatory purposes are considered single legal entities. But there is much debate over the enforceability of reserve isolation, which faces rigorous legal challenges to the structure of protected-cell companies.

The Channel Islands domicile of Guernsey, a U.K.-dependent territory, continues to be Europe's top-tanked captive location and is the third largest in the world--behind Bermuda and the Cayman Islands--in terms of the number of captives it hosts. "Guernsey is seeing much more activity in esoteric areas, such as special-purpose vehicles, risk bonds and the securitization of risk, as well as stand-alone captives, Johnson said. "It has also seen growth from protected-cell companies, especially with the success of Aon's White Rock Insurance Co., which has more than two dozen cells."

Guernsey has 20 protected-cell companies with 90 cells. Its regulator pioneered the framework of protected-cell companies three years ago, and many other major domiciles have followed, Johnson said, citing Cayman's Segregated Portfolio Cos. The Isle of Man, also in the Channel Islands, is Europe's leader in terms of net written premium and capital and surplus per captive, but it has rejected protected-cell structures, judging them unsustainable in the face of legal challenges.

The Channel Islands host more than 54% of Europe's offshore captives, according to the EIMS study. Johnson said the Edwards Report, a 1999 investigation by the U.K. government into the efficacy of Channel Islands' regulation, was positive. "Ironically, it is seen as an endorsement of their regulatory systems, and has become a marketing tool," he said.

Ireland, Gibraltar and Liechtenstein are attracting more attention, because captives in those jurisdictions can underwrite insurance directly in European Economic Area countries. The domiciles also offer captive-friendly laws and regulations.