Traditionally dominated by tropical offshore domiciles such asBermuda and the Cayman Islands, the captives industry in recentyears has been shifting its focus to U.S. shores—a trend that isexpected to continue and perhaps accelerate in 2013 as morecompanies recognize some of the distinct advantages of domicilingdomestically.

“There has been a re-balancing between onshore and offshorecaptive domiciles as these risk-transfer mechanisms become moremainstream,” says Richard S. Smith, president of the VermontCaptive Insurance Association. “The cost, tax and expertiseadvantages to domiciling your captive offshore have disappeared andgiven way to healthy competition among U.S. domiciles.”

On the savings front, domestic captives present loweroperating costs by, for one, eliminating the need to traveloverseas for board meetings.

“With companies taking a hard look at expenses, it's hard tojustify a trip to a tropical island for a board meeting when it canbe done in the U.S.,” says Richard Klumpp, president and CEO ofbrokerage Wilmington Trust and president of the Delaware CaptiveInsurance Association (DCIA). “Between travel expenses, hiringservice providers and the cost of regulation, I'd venture that acompany can save at least 20 percent [annually] throughre-domestication.”

“At present, the differences between onshore and offshoredomicile offerings are becoming narrower, so if all other factorsare equal, the cost savings and convenience of doing businesslocally can come into play,” adds Julie Boucher, head of theVermont office of Marsh Management Service Inc. and Marsh's U.S.Captive Solutions practice leader.

PROGRAM FOR SUCCESS

But cost savings are hardly the only consideration behind themove to domicile domestically.

“Advantages to coming onshore are often program-related,” saysBoucher. “For example, U.S. captives can write TRIA [Terrorism RiskInsurance Act] coverage backed by the federal government” whereasthis option is unavailable to captives located offshore.

Captives can also provide Benefits coverage on a reinsurancebasis with the approval of the Department of Labor, if it is aU.S-based captive or branch, Boucher adds.

Among other attractive qualities, onshore captives also permit agreater variety of alternative risk-transfer mechanisms that maynot be available in foreign domiciles. These includerent-a-captives, in which a captive insurer “rents” its financialservices to an outside organization without requiring the financialcommitments of a self-owned captive; protected-cell companies thatsegregate their assets and liabilities by class share within theirportfolio; and risk retention groups (RRGs) in which eachpolicyholder is also a stockholder of the captive.

“Onshore [captives], business is driven by risk-retention groupsand terrorism risk,” says Sean B. Rider, senior vice president andmanaging director of sales and consulting for the Willis GlobalCaptive Practice.

Domestically, Rider adds, “there is also a more expansive scopeof coverage than what is otherwise available [offshore]: ContingentBusiness Interruption; Nuclear/Biological/Chemical/Radiologicalcover for those involved in urban real estate and public spaces;and alternative risk transfer.”

TAXING BUSINESS

Some U.S.-domiciling decisions are based on tax regulations.States such as Vermont and Connecticut tax captives on a graduatedscale, meaning the rate starts low and gets higher as the companygrows.

Other domiciles appeal to smaller companies by offering flat taxrates, such as Delaware's 0.2 percent rate on direct writtenpremium; offering tax holidays (as Vermont does); or reducingtheir premium tax to zero, as Arizona has, according to RichardKlumpp of the DCIA.

While large corporations still represent the lion's share ofcaptive business, tax and cost-savings initiatives have allowedother, middle-market entities (those with revenues ranging between$50 million and $1 billion), including manufacturers andtransportation companies, to engage in self-insurance.

CAPITAL QUESTION

Another factor contributing to American corporations' move backonshore is the uncertainty surrounding how Solvency II regulations willimpact captives abroad.

Solvency II seeks to review capital adequacy for Europeaninsurance companies and establish new capital requirements andrisk-management standards starting in 2014, with the goal of makingsure insurers have sufficient capital to survive not just thelosses they incur, but also financial-system shocks.

No one yet knows how the regulation will impact captives outsideof Bermuda (which will not be applying Solvency II requirements);whether they will have to use the new standard formula to calculateminimum capital solvency; or whether they will be allowed to usetheir own internal models. But the prospect of greater regulationhas some E.U. captive players worried.

“Solvency II is a big deal because a lot of major U.S.corporations that are captive owners have European exposures andE.U.-based captives,” says Willis' Rider.

OFFSHORE STILL A LURE

Still, for every company that decides to re-domesticate itscaptives business onshore, many are content to stay in Bermuda orthe Caymans.

“I have found that clients with over five years of experience inthe insurance industry are very comfortable with offshore captivesand often prefer to go that route,” says Jeremy Huish, director ofcaptive-advisory firm Artex Tribeca.

Clete Thompson, vice president of marketing and businessdevelopment at Capstone Associated, a captive-insurance planner forthe middle market, notes that the U.S. economic crisis has causedsome states to withdraw funds from captive bureaus, lengthening thebureaus' response time due to reduced resources.

“Those active in the captives arena understand that a captive isa living, breathing insurance company with ongoing issues,” saysThompson. “The captive needs to have responsive regulators in placethat can make timely decisions regarding ongoing issues involved intheir management. States that are short on staff have madeoperating in these domiciles very difficult.”