The growth of US captive insurance domiciles

26-08-2021

The growth of US captive insurance domiciles

Adam Miholic of Hylant Global Captive Solutions

An increasing number of US jurisdictions are either creating captives legislation or overhauling current laws to stay up to date with trends and become relevant, Adam Miholic of Hylant Global Captive Solutions explains.

Selecting a domicile is a crucial component of any captive evaluation process. The number of state- and country-based jurisdictions with active captive insurance legislation available has grown steadily since the first captive formations in the late 1960s.

In addition to the sheer number of domiciles multiplying, the most progressive active domiciles routinely update the captive legislation to ensure they are meeting the current trends and needs of current and prospective captive owners.

While there is a myriad of qualifying characteristics that any domicile must meet for a captive owner to establish in a jurisdiction, most look at the financial, strategic, and operational aspects of the given location. 

Island captive jurisdictions reigned supreme

Offshore domiciles such as the Cayman Islands and Bermuda were the leading jurisdictions fostering captive insurance company formations for US-based companies in the early years of captive formations. Their flexible legislations, options for various captive licences and structures and geographical locations for companies with international operations made offshore domiciles immediate front-runners as a domicile option.

Aggressive premium tax positions and various corporate tax elections often lead many onshore, US-headquartered companies to explore the island domiciles for their captives. Nonprofit organisations and healthcare-related companies also made these domiciles the premier jurisdictions for captives within their industry for decades.

The US becomes more captive-friendly

Over the past 20 years, US state jurisdictions have enacted legislation or updated current captive legislation, mirroring that of the historically more established and better recognised offshore captive insurance domiciles.

Beginning with Vermont in the late 1960s, many states quickly recognised the income potential and flexibility for their corporate residences to provide captive-friendly legislation within their states. The first domiciles in the US legislated captive statutes which were extremely similar to one another. Thus, there was little differentiation between captive domiciles other than geographic location and the experience and depth of the regulatory body.

However, some states were still reluctant to pass captive-friendly legislation. As the volume of new captive insurance formations boomed between 1980 and the early 2000s, more established and recognisable captive domicile names begin to distance themselves from the pack.

States such as Delaware, Hawaii, Utah, and Vermont saw early gains in captive formations as they constantly amended their legislation to stay on pace with the changing needs of captives owners and identified the trends coming from offshore domiciles.

“It is essential for all current and prospective captive owners and their advisors to thoroughly vet all available captive domicile options.”

More states pass captive legislation

As captives have become more accessible to companies of all industries and sizes, state legislators have recognised the potential value, with some additional states enacting legislation, enabling them to attract and retain captive insurance companies.

With the passing of supporting legislations, such as the 2010 Dodd-Frank Act and, most recently, certain state-specific tax positions, there is an increasing number of US jurisdictions either creating captive legislation or overhauling current laws to stay up to date with trends and become relevant.

Newest captive domicile legislation

The latest round of updates is having a dramatic impact on where potential captive owners locate their insurance companies. Those updates include:

  • Domiciles enabling cell captive formations as either agency captives, industrial captives or simply sponsored captive facilities.
  • Expanding allowable types of insurances written through captives, such as workers’ compensation, medical stop loss and benefits-related coverages, and allowable third-party risks.
  • Reduction in minimum capital on surplus requirements, as well as the expanded flexibility of investment options and profit distributions.
  • Dormancy status and the ability to redomesticate without complex application or examination protocols.

Captive domiciles continue to grow

The number of active captive insurance domiciles continues to expand and improve. Given the wealth of opportunities in domiciles, it is essential for all current and prospective captive owners and their advisors to thoroughly vet all available captive domicile options, analysing various elements of the financial, strategic and operational elements to best align a captive jurisdiction with its proposed goals and objectives.

While offshore and foreign domiciles continue to have numerous benefits and attract large numbers of captive applications each year, the advancement of onshore US-based domiciles continue to make onshore captives a progressively competitive option for companies headquartered in the US.

 

Adam Miholic is a senior consultant at Hylant Global Captive Solutions. He can be contacted at: adam.miholic@hylant.com

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