Japanese tax regulations and a heightened sophistication on the part of the country's risk managers have led to a steadily growing trend of Japanese captive formations–many in the growing domicile of Hawaii, the state's captive regulator says.
A growing interest in more creative insurance and alternative risk-financing options in Japan prompted the Risk and Insurance Management Society to add a chapter in the country. Also this year, a track for Japanese insurance buyers that includes captives has been added to the RIMS annual conference program in Honolulu later this month, noted Craig Watanabe, captive insurance administrator for the State of Hawaii's Insurance Division.
Over the last 10 years, the Japanese insurance market has been playing catch-up, he explained. “They had a closed market where foreign carriers weren't allowed in the early 1990s,” he said, noting that recent deregulation of the financial services sector in Japan has allowed foreign carriers and given corporate insurance buyers more choices.
“As a result, their risk managers are becoming more sophisticated, and there will be more [Japanese] risk managers coming to the RIMS conference to learn about more advanced concepts,” he added.
Mr. Watanabe said Japanese captives have been forming at a much faster rate in Hawaii over the past few years than in any other domicile. Hawaii now has 14 Japanese-related captives, he noted.
Part of the reason is a law in Japan that subjects Japanese taxpayers to a tax haven penalty “if they have a subsidiary in a jurisdiction where the tax rate is less than 25 percent,” he said.
When Singapore–once a popular domicile for Japanese captives–lowered its tax rate to about 21 percent five years ago, he explained, Japanese insurance buyers began looking for new domicile locations, making Hawaii an attractive alternative.
Some of those Singapore captives have redomesticated to Hawaii, while others, to get around the penalty, are operating their captives more like a regular insurance company–writing unrelated business and having full-time employees on staff in that jurisdiction, he noted.
Hawaii is typically attracting single-owner captives, he said, adding that the domicile also licensed its first lease capital facility out of Japan–similar to a rent-a-captive, and owned by an insurance producer.
Mr. Watanabe explained that unique to the Japanese market is a law stating that all risk in Japan must be insured by a licensed insurer in Japan. As an example, he explained that property insurance for a factory in Japan could not be purchased from a Hawaii captive directly–the captive would have to be authorized in Japan.
“So in Japan, they negotiate with a [fronting company] to buy a policy in Tokyo for a factory in Tokyo, and then reinsure some of the risks to the Hawaii company,” he said.
This adds stability because under U.S. jurisdiction, the Hawaii company can invest in the U.S. market. This way the company “can get government bonds at a guaranteed 3 percent. In Japan there is not much guaranteed investment,” he noted.
So with all these incentives, why aren't there more Japanese captives in Hawaii? “The Japanese do take awhile to make decisions,” he said, which typically must “filter through the whole management structure. But once they decide to do it, they want it done yesterday.”
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