FSM SNAGS FIRST FOREIGN ‘CAPTIVE’ INSURANCE

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FIRM
New law hopes to attract more in-house insurance

By Frank Whitman

HAGÅTÑA, Guam (Marianas Business Journal, Jan. 28, 2010) – The effort to attract foreign captive insurance companies to the Federated States of Micronesia met with some success recently as, during the fourth quarter of 2009, the nation registered its first captive. In addition, a second company is proceeding with its efforts to establish a captive. And the country recently enacted a law permitting the formation of multiple corporate captives, the third class of such companies now permitted under FSM law.

[PIR editor’s note: Captive insurance is a form of insurance that allows private companies, or groups of companies, to essentially insure themselves, as an alternative to more costly external insurance policies.]

In 2005, the FSM issued a request for proposal for a corporate-registration advisor to entice Japanese corporations to register in the FSM. Micronesia Registration Advisors Inc. won the bid and an exclusive 30-year contract on Nov. 14, 2005. As it was consequently promoting investment holding companies in Japan, prospective clients suggested that a captive insurance domicile would be attractive.

While captive insurance companies have become commonplace in the United States and in Europe, they are only recently catching on in Japan.

"MRA submitted proposed legislation to the [FSM] government," said Mark J. Heath, chief financial officer of MRA. "Whenever we do that, it takes a lot of education, a lot of meetings and discussions. The folks [in the FSM] are very sharp and they know what’s good for their country. Eventually, they said, ‘This can work’."

The FSM’s first captive insurance law was enacted in November 2006.

"We started off with a very plain, vanilla captive program," Heath told the Journal. "In other words, ABC company has assets; they need to insure those assets; they set up their own insurance company, and that insurance company insures those risks. We’ve been promoting that for a couple of years and now we have one [captive insurance company] on the books that’s up and running."

Heath declined to identify the new captive insurance company. However, a June 18, 2009 release from the FSM government’s Public Information Office said that Shinji Kasai, general manager of the Insurance Business Team of Marubeni Corp. had visited in Palikir and said that Marubeni hoped "to begin moving their captive insurance corporate office to Pohnpei to open by Sept. 1."

Marubeni is a 152-year-old Japanese trading company which, according to its 2009 annual report, has about $50.38 billion in assets, 114 offices in 69 countries, 242 operating companies and 3,856 employees. Marubeni is "one of the top 10 companies to do captive insurance from Japan," according to the release.

A second company has "made an internal decision" to start a captive in the FSM. "We’re very happy with that progress," Heath said. He said that he anticipates the new company will be established by March, "if all goes well."

An April 2008 FSM law permitted the formation of Class II captives. Class II captives are those which insure the parent company as well other companies that have a contractual relationship with the parent - "supplier, vendors, brokers and so on," said Heath. "The idea is that [the parent] knows about these companies and knows that they are solid companies because they have some sort of internal relationship with them."

More recently, on Dec. 12, 2009, the FSM enacted a third captive-insurance law permitting the formation of Multiple Corporate Captives or class III captives. "The main difference between class II and class III is that with class I and II you need a million dollars in capital to get started," Heath said. "Class III ... [captives] have some extra protection and the capital requirement is only $100,000." The extra protection required is that the parent company owns at least 10%, and provides at least one of the board members for the class III "baby." "Our hope is that the ‘baby’ grows up in a few years and ... becomes a captive on its own," Heath said.

The FSM is attractive for Japanese captives for a number of reasons, Heath said. It is relatively close, has a stable democratic government, uses American currency and has friendly historical ties with Japan. (See "A captive audience: FSM pitches captive insurance plan in Tokyo" in the June 8, 2009, issue of the Journal.)

The FSM’s biggest advantage, Heath said, is that it has aligned its laws with Japanese tax laws. "Japan has a law about tax havens," Heath said, "If you’re a Japanese company and you earn passive [investment] income in a tax haven, you have to pay a penalty back in Japan. They define tax haven as a country that has an income tax of 25% or less. Micronesia is just on the other side of that threshold. It’s not a tax haven; it’s as close to being a tax haven as you can get, but we’re not a tax haven." A recent reduction in the income tax rate in Singapore has a number of Japanese companies looking for investment opportunities elsewhere.

The FSM’s sovereignty means that it has the flexibility to change its laws, including its tax laws, to maintain its investor-friendly status should Japan, for example, change its tax-haven law.

The FSM’s efforts to position itself as an attractive investment hub can only be helped by two major FSM infrastructure projects - connection to the undersea fiber optic cable being laid from the Marshall Islands to Guam and the Japan-funded runway extension at the Pohnpei airport. The cable will provide inexpensive broadband Internet connectivity as opposed to the less-reliable, low-bandwidth, expensive satellite connection the FSM currently relies on (See "Tyco begins laying fiber optic cable from Marshalls to FSM, Guam" in the Jan. 4 issue of the Journal).

The runway extension, currently underway, makes possible direct commercial flights from Japan. "Those [projects] are very critical and we tell the Japanese all about them," said Heath. "The fiber cable should be installed in few months and up and running. It’s going to be a big change in terms of quickness and communication and mobility. The runway, we’re hoping will be completed a year from March. How much of an impact that’s going to have ... really depends on the airlines, if they’ll start direct flights - that’s what we’d really like."

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