2 May 2013Analysis

Domicile selection: spoiled for choice

Domicile selection presents a lot of questions, particularly in today’s uncertain regulatory environment. Captive International spoke to representatives from four domiciles to suss out what captive owners should look for when selecting a home for their captive.

Simon Owen, insurance director at Folio Insurance Management in the British Virgin Islands, outlined the most basic consideration first. “The needs of captive owners and choice of domicile have become more and more complicated,” he said. “A detailed understanding of the business plan and long-term strategy is vital when considering domicile selection.”

The history of a domicile—the amount of time a jurisdiction has catered to captives— can be a telling determinant when parents have a clear business plan in mind and are ready to look at jurisdictions. Robert Leadbetter, vice president of USA Risk Group Cayman Islands, said: “there are a lot of new domiciles that have popped up within the last five to ten years, kind of ‘flavour of the month’ jurisdictions. Captive legislation gets passed and they throw a lot of resources at it, then in a couple of years it falls out of favour with the local regulators or politicians and falls by the wayside.”

According to Leadbetter, captive owners should be wary of new domiciles for just that reason; a domicile with a long history of working with the captive industry is typically a safer bet. “Some of the more established domiciles— Cayman, Vermont, Bermuda— have been doing this for 30, 40 years and are a little more established. I think that people appreciate that they have some stability in those more mature domiciles.”

Fiona Le Poidevin, CEO of Guernsey Finance, concurred. She noted that the first captive was established in Guernsey in 1922 and that protected cell companies were pioneered on the Island. According to Le Poidevin, stability isn’t the only benefit of a mature domicile. Often more mature domiciles have highly developed captive service industries.  She told Captive International: “As a captive domicile, we’re home to multinational, well-known captive managers, but also independent boutique managers. There is a large range of captive managers to choose from when someone is looking to set up a captive on the Island.”

While Leadbetter maintains that captive service sectors, including law firms, actuaries and accountants, are more developed in offshore jurisdictions like Cayman, Richard Smith, president of the Vermont Captive Insurance Association (VCIA), begs to differ: “I think the differentiation between offshore and onshore has diminished considerably over the last five or ten years in terms of the tax benefits. And any of the specific experience that might have been offshore, you now see in many of the onshore jurisdictions as well. I don’t see much of a difference.”

Smith continued: “Vermont has been in the captive industry since the early 1980s and I think the longevity, expertise and support that the State has built up around this industry has created what people consider the gold standard in terms of the regulatory environment. Every year Vermont looks for ways to improve our captive statutes and regulations, because there are always ways to improve. It’s a very innovative and flexible industry and if you’re not looking at ways to keep current, or be on the leading edge in terms of the regulation and statutes, then you start falling behind as a domicile.”

Le Poidevin also touched on the importance of regulatory innovation, specifically in terms of the impending Solvency II regime. “I think our decision not to seek Solvency II equivalence has stood us in good stead in the last couple of years. It has certainly contributed to some of the growth that we’ve seen and also provided certainty in what is otherwise an uncertain area.”

Owen noted that flexibility is important, particularly in a dynamic area like captive insurance. He said, “captive domiciles cannot simply stand still. Innovation and continued collaboration between the public and private sectors to ensure that legislation keeps up with market needs is imperative for all of the major domiciles.”

Finding a jurisdiction where the government is receptive to the captive industry—and willing to act in its interests—is key. According to Smith, an important factor in selecting a domicile is the captive insurance industry’s clout. He said of Vermont’s strength in that area: “it’s both the strength of the regulatory team and the solid support of the political leadership. It doesn’t matter if they’re Democrat, Republican or Independent: they’re always solidly on the side of our industry.”

Leadbetter said of Cayman: “From a political standpoint I think the government in Cayman understands the importance of the industry. It’s committed to the industry. Cayman is definitely not the cheapest domicile to do business in—obviously that’s always a struggle we have in terms of keeping our costs down, but that’s one of the areas where we’re always working with the government.”

According to Smith, a responsive government is only one half of the puzzle. Domiciles also benefit if they have a strong lobbying presence to fight on behalf of the industry. He concluded: “having the largest captive insurance association is helpful for folks. We’re able to work very closely with the leadership and regulators in [Vermont’s capital] Montpelier but we also have clout in Washington DC when we have to actively pursue national issues that could adversely affect the captive industry. VCIA has clout, and that’s a big plus for the whole captive industry.”