Japanese tax regulations and a heightened sophistication on thepart of the country's risk managers have led to a steadily growingtrend of Japanese captive formations–many in the growing domicileof Hawaii, the state's captive regulator says.

A growing interest in more creative insurance and alternativerisk-financing options in Japan prompted the Risk and InsuranceManagement Society to add a chapter in the country. Also this year,a track for Japanese insurance buyers that includes captives hasbeen added to the RIMS annual conference program in Honolulu laterthis month, noted Craig Watanabe, captive insurance administratorfor the State of Hawaii's Insurance Division.

Over the last 10 years, the Japanese insurance market has beenplaying catch-up, he explained. “They had a closed market whereforeign carriers weren't allowed in the early 1990s,” he said,noting that recent deregulation of the financial services sector inJapan has allowed foreign carriers and given corporate insurancebuyers more choices.

“As a result, their risk managers are becoming moresophisticated, and there will be more [Japanese] risk managerscoming to the RIMS conference to learn about more advancedconcepts,” he added.

Mr. Watanabe said Japanese captives have been forming at a muchfaster rate in Hawaii over the past few years than in any otherdomicile. Hawaii now has 14 Japanese-related captives, henoted.

Part of the reason is a law in Japan that subjects Japanesetaxpayers to a tax haven penalty “if they have a subsidiary in ajurisdiction where the tax rate is less than 25 percent,” hesaid.

When Singapore–once a popular domicile for Japanesecaptives–lowered its tax rate to about 21 percent five years ago,he explained, Japanese insurance buyers began looking for newdomicile locations, making Hawaii an attractive alternative.

Some of those Singapore captives have redomesticated to Hawaii,while others, to get around the penalty, are operating theircaptives more like a regular insurance company–writing unrelatedbusiness and having full-time employees on staff in thatjurisdiction, he noted.

Hawaii is typically attracting single-owner captives, he said,adding that the domicile also licensed its first lease capitalfacility out of Japan–similar to a rent-a-captive, and owned by aninsurance producer.

Mr. Watanabe explained that unique to the Japanese market is alaw stating that all risk in Japan must be insured by a licensedinsurer in Japan. As an example, he explained that propertyinsurance for a factory in Japan could not be purchased from aHawaii captive directly–the captive would have to be authorized inJapan.

“So in Japan, they negotiate with a [fronting company] to buy apolicy in Tokyo for a factory in Tokyo, and then reinsure some ofthe risks to the Hawaii company,” he said.

This adds stability because under U.S. jurisdiction, the Hawaiicompany can invest in the U.S. market. This way the company “canget government bonds at a guaranteed 3 percent. In Japan there isnot much guaranteed investment,” he noted.

So with all these incentives, why aren't there more Japanesecaptives in Hawaii? “The Japanese do take awhile to makedecisions,” he said, which typically must “filter through the wholemanagement structure. But once they decide to do it, they want itdone yesterday.”