Derek Lloyd looks at the factors you need to consider when evaluating whether or not to redomicile your captive, and the practicalities involved if you decide to proceed further.
Redomiciliation of a captive, or continuance as it is called in certain jurisdictions, is the movement of a captive from one domicile to another while maintaining the same legal entity.
Contrary to some opinions expressed in certain quarters of the captive industry, there is no particular trend for the movement of existing captives from offshore to onshore, onshore to offshore or any permutation thereof, but it is true to say that there is an increased movement or redomiciliation of captives at the present time, and this has arisen due to a combination of factors.
In recent years, the expansion of the domestic market in the US has certainly provided captive owners with an increased choice of where to domicile their captive, existing or new, alongside the traditional international finance centres in Bermuda, the Cayman Islands, the British Virgin Islands and other similar jurisdictions.
External political pressures and the recent economic meltdown have also caused many captive insurance companies to re-evaluate their original choice of domicile, as the factors that existed some years ago when a particular jurisdiction was chosen may no longer be relevant today.
In our own circumstances, it is fair to say that we have seen some of the smaller, more cost-conscious captives redomicile from the British Virgin Islands to certain of the US states or emerging international domiciles, particularly those with new legislation that is perceived to have a ‘lighter regulatory touch’ designed to encourage business there in the first place. Conversely, we have also seen new captive formations come to us because the onshore legislation does not permit the writing of certain proposed business risks for the captive or because certain ownership structures are better suited to the international financial centres than to domestic markets in the US. We have also experienced the movement of existing captive businesses from other international jurisdictions, such as Bermuda and the Cayman Islands, as captive owners become more discerning and cost-sensitive in the current economic climate with regard to professional and regulatory fees.
What are the factors that a captive owner should consider with regard to the location of its captive?
Different motivating factors will apply for individual captive owners in differing scenarios.
"If the two regulators are in agreement and the corporate legislation duly permits, then the captive owner can proceed with the relocation of the captive to a different jurisdiction with negligible disruption."
These will range from simple logistical features, such as the geographical location of the proposed new domicile for ease of access and the relevant time zone for ease of communication during conventional business hours, to more economically driven factors, such as the existing regulatory environment and regulatory fees, or the overall political stability and international perception of a specific domicile. The availability, quality and professionalism of the insurance management team and that of other service providers acting on behalf of the captive will also feature in the decision-making process, as will the perceived value for money on the overall level of professional fees expended—the latter never more so, as businesses across the globe, never mind purely captive insurance companies, assess their current operating costs and overheads.
Capital and solvency requirements in the differing locations and any specific investment restrictions will all need to be evaluated by the prudent captive owner and its advisers before proceeding further, as will any potential tax implications, beneficial or detrimental, for the proposed movement of the entity.
All of these factors need to be fully evaluated in conjunction with the respective professional advisers—insurance, corporate, legal and taxation—before a considered decision can be made.
Practicalities of redomiciliation
The process of redomiciliation or continuance is not as complicated as some may believe, subject to the initial caveats that the company’s by-laws permit such an action and, likewise, that the corporate laws of the original domicile and those of the proposed new jurisdiction allow the same. If they do, then the captive owner and its advisers can move to the next stage.
Minor variations will undoubtedly apply, depending on the requirements of the two domiciles in question, but in broad terms, the following will be necessary:
• Insurance regulatory approval from the existing domicile for the continuance of the captive insurance company elsewhere commonly by way of a ‘letter of no objection’ from the insurance division
• Corporate regulatory approval from the existing domicile, including:
· Certificate of good standing
· Certificate of discontinuance (on conclusion of the process)
• Insurance regulatory approval from the proposed new domicile for acceptance of the captive, which will typically include:
· Initial meeting with the regulator, with the reason for the proposed redomiciliation duly outlined
· Evaluation of the existing financial condition of the captive by way of a review of the audited financial statements of the captive and the parent company, as well as the financial projections of the captive
· Review of the investment and dividend policy of the captive
· Confirmation that the company is fully compliant with all existing statutory requirements in the existing domicile (certificate of good standing, as above)
· Completed application and due diligence requirements for the ultimate beneficial owners and directors and officers of the entity
· Updated business plan to ascertain the coverages, exposures and values at risk · Review and acceptance of any fronting and reinsurance arrangements
• Corporate regulatory approval from the proposed new domicile for acceptance of the existing corporate entity, including:
· Copies of the memorandum and articles of association or company by-laws
· Copies of the registers of members and directors and officers
· Certificate of continuance issued to confirm the new status of the corporate (on conclusion of the insurance licence approval and redomiciliation process).
If the two regulators are in agreement and the corporate legislation duly permits, then the captive owner can proceed with the relocation of the captive to a different jurisdiction with negligible disruption to the operations of the entity and its insurance programmes. In the majority of instances, this would be the preferred option for the captive, although there may be occasions when it is more appropriate to formally dissolve the entity in the existing jurisdiction and form a new entity in the preferred domicile of choice.
With the co-operation of all relevant parties and receipt of the documentation outlined above, the redomiciliation process can be concluded within six to eight weeks, with typical additional costs ranging from $3,000 to $5,000.
Redomiciliation will rarely be solely cost-driven, but the perceived longer-term financial benefits of going through the process will no doubt be a major consideration for many captive owners. While the process itself may also require expending additional time and effort in the short term in putting together an acceptable submission for the new domicile, significant cost and operational benefits may well be available to the captive for many years to come.
Derek Lloyd is director and insurance manager of AMS Insurance Management Services Ltd, in the British Virgin Islands. He can be contacted on: (00)1 284 494 4078 or at: firstname.lastname@example.org
It should be noted that the content of this article is designed to provide a general overview only to the typical redomiciliation process and that specialist advice should be sought for your own specific circumstances. Specific information about the British Virgin Islands is available at: www.amsbvi.com