in spite of soft conditions in the commercial market, concerns over regulatory developments in Europe and the US, and the fragile nature of the continuing global economic recovery.
The year’s winners
Leading the way in terms of new formations was Utah, the state boasting 54 new captive formations during the year, as it continues to develop its already significant captive industry, reaching 184 single-parent entities in 2010. As Ross Elliot, captive insurance director at the Utah Insurance Department indicated, it has been a good year for the state, with the last quarter of the year particularly busy, accounting for 42 of the new formations. “As the year began to wind down, economic news turned more optimistic and many firms elected to initiate their previously developed plans to implement a captive solution,” Elliot said.
Utah was closely followed by a number of other states with already strong captive industries and associations: Delaware gained 46 new captives, Vermont another 33, and Kentucky and Montana both added a further 25 captives to a combined bench of 862 group and single- parent captives between the four states. Vermont incorporated its 900th captive in March of this year. Delaware, for its part, celebrated its 100th captive formation this March, the news from both states evident milestones in their captive development.
Meanwhile, a number of states recorded significant growth in
percentage terms: Alabama recorded a 100 percent increase in captive formations—from five to 10 captives—with Michigan mirroring Alabama’s achievement as captive entities in the state rose from two to four, while Missouri increased its captive base from six insurance entities to 11.
Further building on these evident successes, two US states— Louisiana and Maine—welcomed their first captive entities this year, while New Jersey enacted legislation to enable captive entities to be formed in the state, with the New Jersey regulator modelling its new statute on that of Vermont’s highly successful captive template.
Conducive conditions Examining the successes achieved by a number of US states in the
captive arena, it would seem that a conducive and stable regulatory and business environment is key to positive, ongoing development. As Peter Cavanaugh of NEIL (Nuclear Electric Insurance Ltd)—the largest captive insurer in the world—said when addressing the strengths of his captive’s domicile, Delaware: “Delaware has been our home for 23 years and for good reason. It has successfully synthesised effective regulation with a business-driven environment.” Elliott of the Utah Insurance Department spoke in a similar vein about the attractions of Utah, highlighting the state’s “accessibility, favourable legislation, [and] business-friendly environment” as being key to another successful year of new formations. While Vermont’s director of financial services, Dan Towle, attributed another year of positive growth at the leading US domicile to “the fact that companies continue to see Vermont as the most stable and high-value captive domicile available”. It would seem that success lies in the details, and talking with the domiciles, it is clear that positive, business-friendly amendments to captive regulation remains a key driver of captive growth.
12 US Captive . April 2011
Positive expectations Looking forward, expectations for further captive growth in 2011-
2012 are good, with around two-thirds of captives confident that they will record further growth in the coming year. Obvious correlations can be drawn between those that recorded growth in the past year and those that expect further formations in the coming 12 months, with the same states that grew in 2010 expecting further upward movement in 2011. Asked what factors were behind positive expectations for the coming year, state captive associations and insurance departments cited a number of reasons, including modifications to captive legislation, improving economic conditions in the wider US economy and the specific attractions of their individual jurisdictions.
Topping the list of reasons for projected upward growth were legislative
and regulatory changes, with six states—Louisiana, Maine, Nevada, New Jersey, South Dakota and Tennessee—all indicating that they had changed, or were planning to change, their captive legislation. Louisiana and South Dakota recently amended existing legislation, with Louisiana indicating that it hoped that the “recent passage of enabling statutes” will help them to build on the single captive they presently have, while South Dakota amended its captive legislation to allow for group captives. New Jersey, for its part, became the latest state to introduce captive legislation and is hoping that those local corporations that had previously taken their captive business to other states, or offshore, will now consider domiciling or redomiciling their captive in their home state. For Louisiana, Nevada and Tennessee, there were expectations that forthcoming changes to captive legislation would help to secure further formations moving forward. Nevada indicated that proposed legislation in the state would help “reduce costs associated with captive ownership and administration”, while Tennessee indicated that it “intends to streamline captive reporting requirements and to hire staff with captive expertise, in order to become a competitive player in the market”.
Regulators in South Carolina and Utah—significant captive
domiciles with 348 captive entities between them—both cited improving conditions in the US economy as a key upward lever on captive growth, with increasing confidence in the wider economy, job growth and declining unemployment all likely to encourage US firms to consider again the attractions of captive entities, which had been somewhat sidelined during the recent economic downturn.
Finally, individual measures such as Maine’s Pine Tree Development Zone, which offers 100 percent corporate tax credit for 10 years, and strong, existing captive industries and conducive captive environments such as are evident in the likes of Hawaii, South Carolina and Vermont, will likely spur further future growth as the American captive sector finds increasingly positive conditions for growth.
And for some states, expectations are high—Delaware indicated that
10 new captives are in the pipeline for its first quarter, while South Carolina indicated that “there are more prospects in the pipeline right now than we’ve had in three years”.
It seems that the future is bright—particularly for those with active, responsive and well-developed captive sectors—with the successes of the major players evidently encouraging a number of US states to take steps to develop their own competitiveness. Under such conditions, it seems likely that the US captive sector will continue to thrive and further develop its scope, capacity and role in the wider US economy.
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