Tax Impact on the Value of Japanese Captive Insurers (10周年記念号)

This study identifies whether or not, or to what extent, tax regulations on captives have impact on the firm value and also on managerial decisions of where captives should be incorporated. Many Japanese captive owners choose their captive domicile to reduce tax liabilities with captives in non-tax haven countries such as Hawaii and Micronesia. This study finds that the tax haven status of domicile does not have material impact on net value created. Our hypothetical captives in tax haven countries create positive net value while captives in non-tax haven countries create negative. We conclude that managerial decision should be not only based on tax regulations but also other factors surrounding captive. Yuji Maeda insurance parent company or companies, and that underwrites the insurance business of its parents either directly or by means of retention. With captives, most of multi-national corporations establish their own insurance vehicle to finance their losses rather than transferring losses with insurance. The practice of captive finance in risk management has become common among multinational companies in U.S., UK and recently European Union Countries. In fact, the number of captive insurance companies has been growing steadily. As of March 11, 2013, there are 6,052 captives in the world. Contrary, Marsh Broker Japan reported that there are currently 70 to 100 Japanese captives and the number appears to be rather stable over many years. Special Report of Business Insurance on March 11, 2013 reported that Bermuda is the top in the number of captives, 856 captives ; Vermont is the third, 586 ; Guernsey is the fourth, 333 ; Luxembourg is the eighth, 238 ; Hawaii is 11th, 179 ; Dublin is 15th, 141 ; Federated States of Micronesia is 43rd, 9. Micronesia, however, indicates that most of its captives are owned by Japanese firms. It promotes that Micronesia provides favorable business environment for Japanese captives, especially with its 21 percentage corporate tax rate where disadvantageous tax haven law does not apply to the captive. Various reasons have been presented by researchers on why companies use their captives rather than traditional insurance to manage risks. One is to have it a key driver to encourage risk management and controls within the organization. Other reasons include, but not limited to, to obtain investment income on the loss fund, to offer an arbitrage opportunity for difference in insurance premiums, and to have flexibility of the insurance program (Lenrows et al. (1982)). Risk management practitioners argue that many Japanese captive owners, however, point out reducing tax liability to be the primary reason for establishing their captives overseas. This fact appears to contradict the reasons for captive finance presented by risk managers of other countries. Therefore, our study attempts to find whether or not Japanese risk managers should consider the tax regulations for domicile selection from the standpoint of value. The result of the study will ultimately provide an answer to the important questions for risk management practice of Japanese corporations. Brief Literature Review Despite the existence of more than 6,052 captives worldwide, 70 to 100 of which are 2