16 September 2013Analysis

Proliferation of domiciles may damage regulatory oversight

A recent report by Fitch Ratings has raised the spectre of the dumbing down of regulatory oversight by some jurisdictions as the number of captive domiciles increases.

Fitch said that the most significant threat posed by the proliferation of captive domiciles is that “domiciles might sacrifice prudent regulatory oversight in order to attract and maintain a minimum number of captive registrations.”

The US appears to be a case in point, with two new US states enacting captive legislation in 2013, bringing the total number of captive-ready states in the US to 32. Other states look likely to follow suit, with new entrants increasing the number of captive options by 50 percent over the past ten years.

While healthy for competition, half of the 32 domiciles license less than five captives. Don Thorpe, senior director at Fitch said: “Some states view captive growth as an important potential source of revenue and some are very actively courting the captive market. States will need to carefully manage the potential conflict of interest between rapid growth in captive registrations and prudent captive oversight.”

While captives are not necessarily looking for light-touch regulation, many might allow their risk management capabilities to weaken if not required to maintain rigorous standards, Fitch said. Fitch added that the expansion of domiciles could also spread the level of captive regulatory expertise too thinly, reducing its effectiveness across the US.

Proliferation does however help to drive down fees, streamline the review and approval process and encourage the creation of innovative structures, the report found.