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Revamping a rocky image.

DESPITE BEING THE FIRST state to enact captive legislation in 1971, some say the Colorado captive industry has yet to pick up steam. Although the state legislature passed three sets of amendments in the past five years to make the captive climate more enticing, Colorado, with just 35 captives, has just begun to gain the necessary momentum to attract more business.

In the late 1980s, Colorado captives were heavily regulated, which did not sit well with parent companies unaccustomed to being treated like insurers. Since Colorado nearly held a monopoly among captive domiciles in the United States, the state never saw the need to heavily promote itself. Soon, however, other states entered the industry, luring companies with promises of less restrictive captive laws and lower taxes and capitalization requirements.

There is no substitute for experience. Colorado appears to have leaned its lesson, says Arthur Koritzinsky, a senior vice president at Johnson & Higgins Co. Today there is a definite change in attitude and a real desire to compete on an equal footing with the other domiciles. Colorado is no longer "overregulated and there is a willingness to sit down with a client," says Mr. Koritzinsky.

In the 1980s, Johnson & Higgins' first Colorado captive, the Boeing Corp., pulled up stakes and headed for Vermont. However, in 1990, one of the company's Vermont captives, Farm Credit System Association Captive Insurance Co., moved to Colorado because the state was savvy enough to amend its captive laws to permit entities other than stock corporations to domicile there.

Gwyn Shuel, director of risk management for the University of Colorado, whose captive, the University of Colorado Insurance Corp., is domiciled in Colorado, agrees the state has turned over a new leaf. Recently, she says, it enacted a reduction of the premium tax on captives. By 1994, the tax on direct premiums--which had been 1 percent--will be .50 percent of the first $25 million and .25 percent of the next $50 million.

Another prescient move on the part of the state legislature, says Donald Willhite, executive vice president of Parker Risk Management Inc., was its decision to allow captives to use their parent company's fiscal year-end instead of requiring use of a calendar year. In effect, the probable need for two separate audits--and a potential accounting nightmare--was avoided.

Colorado is also becoming more aggressive in marketing itself as a haven for captives. John Kezer, former state insurance commissioner and now a private attorney and president of the Colorado Association of Captive Entities, recalls that he and Governor Roy Romer viewed promoting captives as a way to shake the state out of its economic doldrums.

"Our strategy was to develop Colorado as an insurance headquarters state, with captives as the catalyst," he says. "The cost of living, hi-tech environment, reasonably priced office space and governmental infrastructure suggestd an incredible fit."

Indeed, according to the Office of Economic Development, new office space in Colorado rents for $12 to $15 per square foot. Conversely, in Honolulu, rental rates for office space average between $33 and $36 per square foot. The state was already a regional insurance center, as well as headquarters to such companies as Great West Life, Capital Life, Security Life and Guaranty National.

In addition, Deputy Commissioner of Insurance Bruce Smith cites an educated work force, good central location (the state is 200 miles from the geographical center of North America and equidistant from Europe and the Pacific Rim) and pleasant quality of life to be Colorado's advantages.

While recent legislation has effectively addressed captive concerns and competitive issues, the state still needs publicity that will allow funds to be allocated for captive formation. In fact, the task of promoting the state has fallen largely on the Colorado Association of Captive Entities (CACE), which is also a lobbyist for amendments to captive law geared to making the state more competitive.

Ultimately, Colorado is hopeful that corporate cost-consciousness will spur a trend toward redomesticating captives that have moved away. "If you look at the reason you keep a captive, it is to keep your fixed costs down, and travel expenses go into your fixed costs," says Lucille Gallagher, vice president of risk management for Montfort of Colorado Inc. and RIMS' vice president of Governmental Affairs.

Not only are companies trying to avoid the expense of long-distance travel and accommodations, says Ms. Gallagher, but they are also exploring whether they can manage their captives in-house. Samuel Fisher, a former chairman of CACE and risk manager for Hamilton Oil Co., moved the company's Bermuda captive to Colorado after federal tax law changes neutralized the offshore advantage. "Because we are a Colorado-based company, the move offered us the opportunity to save even more money by managing it in-house," he explains.

Colorado has been criticized by some captive managers for being too tough on applicants. For instance, the state insists on the existence of a properly capitalized reinsurance program for its captives as well as hard proof of how expected premiums were derived. However, some see the stringent requirements as a plus. "The industry's heavily regulated, so signs of impending insolvency will be more visible," says Ms. Shuel.

Part of the state's problem, says Deputy Commissioner Smith, is that Colorado has allocated limited resources to captive regulation. "Right now, we have one and one-half people reviewing captives," he says. Since the problem will only worsen when the market firms up, the state is working with CACE to form an advisory committee, with members selected from a rotating list of insurance professionals. The committee will review applications, interface with applicants, make recommendations to the division and handle compliance matters. "They will essentially be the division's agents," says Mr. Smith.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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