'Captive' insurance market feeding Hawai'i's economy
By Dan Nakaso
Advertiser Staff Writer
Kingston Technology Co. in Orange County, Calif., might as well be on a recruiting poster for Hawai'i's competitive and growing "captive" insurance industry.
Like other companies that faced higher insurance costs last year, Kingston officials shopped around and finally decided to set up their own company or captive to handle their insurance. They looked in Nevada, Bermuda and the Cayman Islands and ultimately decided that Hawai'i offered the most benefits. It was also closer to Asia, where the company has operations in Taiwan, China and Malaysia.
By the time Kingston's insurance program began in January, insurance companies on the Mainland were folding or charging exorbitant rates because of the fallout from Sept. 11.
"The situation got a lot worse," said John May, the director, treasury, for Kingston, which manufacturers and assembles computer memory modules. "We ended up looking like a bunch of geniuses."
In the past 16 years, Hawai'i has seen its captive insurance market grow into a multimillion-dollar industry that includes more than 100 companies, most of them from the Mainland. And state officials hope that legislation signed into law this month by Gov. Ben Cayetano will draw even more companies to Hawai'i by offering a better tax break to larger corporations.
Instead of an across-the-board tax, companies with premiums of more than $50 million will be taxed at 0.5 percent. Smaller companies will be taxed at 0.25 percent for the first $25 million in premiums and at 0.15 percent up to $50 million.
Some of the companies that have set up insurance operations in Hawai'i include major corporations such as Nike, Nissan and Advanced Micro Devices. They designed their companies to cover a range of insurance areas, including workers compensation, product liability, auto liability, earthquake and other property damage, warranties, employee benefits and employee taxes.
In 2001, the state had $426 million in premiums from captive insurance companies, with $370 million in assets held in Hawai'i.
The incentive for companies to set up their own captive insurance operations include cost savings and fewer surprises.
Companies that set up their own insurance companies can get tax breaks from the IRS and sometimes deduct premiums. For companies accustomed to self-insurance, a captive program lessens the hit on stockholders who might not like seeing an unexpected multimillion-dollar payout.
Out of 17 states with captive insurance legislation, Hawai'i ranks a distant second to Vermont, which has more than 500 companies. But state tax officials and people in the industry hope the new law draws even more companies.
"We were finding that we were very competitive for the medium- and large-sized companies," said Alison Mortlock, a director of the Hawaii Captive Insurance Council and branch manager for Marsh Management Services Inc., which manages captive insurance companies. "But for the very large corporations, they were finding savings in Vermont."
Tax officials are also looking to attract companies from Asia. And they've met with officials from the University of Hawai'i to possibly offer a curriculum in captive insurance.
The timing seems right as companies face higher premiums. And state officials say they have found that captive insurance companies pump needed millions into the island economy.
In 2001, the captive insurance market spent $6.5 million in direct costs to an estimated 50 Hawai'i lawyers, managers, accountants and auditors who focus solely on captive insurance. The tourism industry saw another $18 million because of a requirement that captive insurance companies established here hold their annual board meetings in Hawai'i.
"The side effects are really quite large," Mortlock said. "Some of the board meetings mean 10 or 12 people fly in, and they all tend to bring their families and then fly on to a Neighbor Island."
In the early 1980s, Vermont became the first state to push for legislation setting up a captive insurance industry. Hawai'i followed in 1986. The number of companies setting up captive insurance companies in the Islands has grown steadily from a handful each year to 10 to 15 in the past few years.
"We have a pretty good group of people to ensure that the captive insurance company remains solvent," said Garett Kashimoto, education specialist for the state insurance division. "Our laws are structured so that if a company comes in, they'll be assured that everything's done properly."
Servco Pacific used to be self-insured. But company officials decided to set up a captive insurance company to cover the new car warranties it sells through its car operations in the Islands.
"The captive insurance laws are very favorable to companies," said Joseph Hu, senior vice president for Servco Pacific. "And you need to have the banking system in place. You need people with the accounting and legal background in captives and you need to have insurance people who know about captives."
May is happy with the way the captive insurance program has worked so far for his company.
But he's equally excited about the company's first Hawai'i board meeting in October.
"We're all turning it into a family vacation," he said. "I had people lined up to be board members."
Reach Dan Nakaso at 525-8085 or firstname.lastname@example.org.