Nicknamed ‘the Grand Canyon state’ and best know for its desert landscape and erratic climate, it is apparent from the get-go that the State of Arizona has a lot more to offer than just insurance services.
Nicknamed ‘the Grand Canyon state’ and best know for its desert landscape and erratic climate, it is apparent from the get-go that the State of Arizona has a lot more to offer than just insurance services.
With more than 30 states offering captive insurance services, the US is not the easiest of places to stand out in the market. But with a cumulative count of 101 captives at the end of 2012, according to the Arizona Department of Insurance, the state is steadily moving up the ranks.
Arizona did not pass its captive insurance laws until 2002. Starting with four new captives, growth jumped to double digits annually through to 2008.
Peter Kranz, managing director at Beecher Carlson, explains that while growth has been quite steady “in recent years, in part due to the economic downturn and M&A activity, that growth has slowed”.
Currently, more than 75 percent of captives in Arizona are pure captives, with nearly 70 percent of those in the healthcare, construction or financial services industries, explains Kranz.
“Arizona captives can write all of the standard commercial property and casualty and liability lines of business—over a quarter of captives in Arizona write or reinsure workers’ compensation, general liability and medical professional liability.”
“Arizona typically attracts sophisticated risk financiers and has a significant presence in the healthcare, construction and financial services sectors.”
But for Kranz, the most tangible benefit to domiciling a captive in Arizona is that there is no premium tax, which is particularly attractive to larger captives that would be pushing up against a $150,000 to $200,000 cost in other domiciles.
The regulatory bulletin from the Arizona Department of Insurance for its captive insurance programme states: “Arizona captive insurers are not required to pay state premium taxes … this omission is crucial because comparison to captive insurance laws in other domiciles, US and alien, plainly shows that when captive insurance premiums are taxed it is according to a schedule specific to that form or insurance rather than that at the rates applicable to ordinary commercial insurance business.”
“As evidenced by the legislative history, the Arizona legislature made a deliberate decision to enact a statutory scheme that would not impose premium taxes on these specialised insurers.”
Kranz also adds that the state is well positioned geographically for companies whose primary operations are located on the West Coast.
While Arizona may not be the most obvious choice when selecting a US domicile Kranz believes that the lack of premium tax charges is certainly a “huge plus” for the state.
“A few other domiciles have tried to replicate this benefit, but interestingly the growth of those domiciles hasn’t been with the large captives or parent organisations.”
“In attracting large, sophisticated organisations, Arizona has developed a business friendly environment that is committed to the captive insurance industry.”
With experienced Caribbean domiciles such as the Cayman Islands, Bermuda and Anguilla within close proximity of the US, it is understandable for American firms to venture offshore. But according to Kranz, the allure of offshore has depleted in recent years.
“For captives of US-based parent companies, in particular, the benefits of going offshore have really dissipated over the last decade or so … [and] when you look back to 2008 and the global recession, the perception of going to an exotic location really took a hit.”
“At least temporarily, that mindset hasn’t changed with US companies—current economic policies in the US are leaving open significant questions about a continued recovery so finances will stay under close scrutiny. Further, over the past decade in particular, more jurisdictions have joined the captive world and more captive infrastructures (regulatory and service provider) have greatly matured—the appeal of some offshore domiciles is that they ‘know insurance’ but that is just not the playing field anymore as the industry in whole domestically has grown as mature and possibly more dynamic.”
But though US parents are currently more likely to opt for onshore, the current turnover of staff in the regulatory regime in Arizona could well discourage potential firms from choosing the state as it “[raises] questions about the consistency of how captives will be regulated and handled,” says Kranz.
In July last year, Christina Urias resigned as the director of Arizona Department of Insurance. Also in 2012, Stephanie Lefkowski resigned as chief analyst of the insurance department’s captive division.
But Kranz is hopeful that the recent confirmation of Gerrie Marks as the new director and Vince Gosz as chief analyst could turn the state around.
“Vincent Gosz is committed to the captive industry succeeding in Arizona and has demonstrated that commitment in his dealing with existing captives during his short time onboard.”
“I can tell you firsthand that Gosz seems like the guy who can change [the] perception [the state] and bring some stability and strong leadership in Arizona.”
