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Captives in paradise.

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. "They built protections into the business plans and then approved them," he says.

In addition, some attribute Hawaii's success to its being receptive to risk retention groups, while other domiciles have become less interested because they are more complex than single-parent captives.

The true secret of Hawaii's success, say several captive managers, is aggressive marketing through promotions that compare the state to "paradise." Hawaii hosts forums on captive insurance as well.

The state has focused a marketing program on American companies located west of the Rockies as well as on Pacific Rim multinational companies with U.S. subsidiaries, Mr. Zuckeran says. Hawaii also would like to become a domicile for Pacific Rim companies seeking to insure non-American risks, but has had no luck so far. "We hope the Far East will bear fruit within a year," Mr. Zuckeran says.

According to Laura Taylor, operations manager of captive development for Industrial Indemnity, the domicile of choice for Japanese companies appears to be Singapore because of the tax advantages.

Despite Hawaii's Pacific Rim focus, the state has lured American captives from the Atlantic Coast as well, including Baltimore-based Water, Wastewater and Process Equipment Manufacturers Insurance Co. Inc.; New Jersey-based Biotech Pharmaceutical; and Washington, D.C.-based Marriott Corp. Carla Patterson Becker, director of insurance accounting at Marriott, says that the company moved its captive onshore so it could begin loaning funds to the parent without paying a 30 percent federal withholding tax.

Marriott moved its captive from Bermuda, but maintains a presence to handle run-off business and to keep its options open if the captive environment changes in Hawaii. The state's low premium tax was a factor in the company's decision to go there, Ms. Becker says, but more important was the support Hawaii's government gave to the industry. Also, because Hawaii is a newer domicile, "We thought we might be able to impact future legislation," she says. The state's present legislation requires that captives conduct their business in the state, which, for Ms. Becker, means a 15-hour trip from the mainland.

The joint efforts of the Department of Commerce and Consumer Affairs and the Department of Business and Economic Development were instrumental in pushing for captives as a "clean line of business for the state," says Paul Pinckney, a vice president and principal of Tillinghast. Captives are non-polluting and do not tax the state's business infrastructure, he says. "They provide opportunities to use existing business systems and do not necessitate creating new ones." Mr. Pinckney also notes the cooperation between the Department of Commerce and Consumer Affairs and the Department of Labor and Industrial Relations in allowing direct writing of workers' compensation for employees in Hawaii.

Regarding the state's captive insurance infrastructure, there are more than a half-dozen captive management offices, several major law firms, and branches of all the major accounting firms and brokerages. "You do not have to bring your whole team with you," notes Mr. Pinckney.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:A Guide to U.S. Captive Domiciles; Hawaii
Author:Adler, Sam
Publication:Risk Management
Date:Apr 1, 1992
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