Many jurisdictions around the world are competing to host your captive. Choosing the right domicile ensures the optimum tax and regulatory treatment, and that the right service providers are on hand, say Lori Holford and Tania Davies of Atlas Insurance Management.
In recent decades, captives have become an integral part of a growing number of companies’ risk management strategies. As captives have increased in number, the businesses they serve have also moved well beyond the traditional core of large corporations to include medium-sized companies and associations.
Among the first questions to be addressed by shareholders when establishing a captive, even as the structure is being determined, is where the resulting entity should be domiciled. There are scores of jurisdictions scattered around the globe, varying significantly in their history, legal traditions and even in the types of services they offer.
How should prospective owners approach the subject of domicile? What questions should be answered and comparisons made when contrasting domiciles? Exactly what makes a domicile the right choice for your captive insurance company?
This article provides a brief discussion of some points to be considered when selecting a domicile for your captive.
Begin with the basics
A captive may be profoundly affected by the regulatory environment of its choice of domicile, so this should be regarded as a foundational consideration. Domiciles, both US and non-US, vary significantly in their familiarity with, and exposure to, captive insurance concepts.
Each jurisdiction has its own requirements for solvency and capitalisation. A solvency requirement determines whether the captive is sufficiently capitalised to withstand adverse loss reserves, while liquidity ratios are used to determine whether the captive will have assets available to pay losses in a timely manner. These regulations are to everyone’s ultimate advantage, since the rules are transparent and easily administered.
“Domiciles vary significantly in how they treat the taxability of total written premium, underwriting income and investment income.”
Attention should be paid to the premium and the foreign or domestic implications in regard to tax treatment. Domiciles vary significantly in how they treat the taxability of total written premium, underwriting income and investment income. In addition, the need to pay federal excise taxes can differ between jurisdictions.
Owners should be aware of which third-party services they will require, together with the attendant fee structure for these engagements. The need for various core services will be dependent to some extent upon the domicile chosen and the necessary filings to be made in that jurisdiction.
Certain domiciles require that only local service providers be engaged and in those circumstances the choice available will differ depending upon the relative sophistication of that jurisdiction. The Cayman Islands, for example, has a lengthy history in captive insurance, with the resultant first-class infrastructure of service providers.
Some jurisdictions may require travel to the domicile for board meetings, while others require a board member to establish permanent local residency. There will be costs associated with both these obligations and these would need to be factored into any overall assessment.
Finally, the political stability and legal traditions of the state or country should be taken into consideration.
Know thy regulator
Almost as important as the regulatory environment is the office and person of the regulator, whether this be the deputy commissioner or another department head. Depending on the domicile, a regulator may be either an elected or appointed official.
In almost all domiciles the degree of oversight is apt to be far-reaching, including not only the captive insurance company and its owners, directors and officers, but extending to any reinsurance programmes used by captives, as well as service providers. The latter can include captive managers, actuaries and CPA firms.
The expertise of local regulators reflects the jurisdiction’s history as a captive domicile. The Cayman Islands has long been an established leader in healthcare captives, developing expertise in group captives and catastrophe bonds.
In the US, North Carolina’s regulator works to create an environment that fosters strong growth and stability. South Carolina caters to multiple self-insured structures by offering a business climate that is friendly to both resident companies and visitors. North Carolina and the District of Columbia both have specific staff departments wholly devoted to captive insurance within their Departments of Insurance.
Depending upon the complexity of the proposed structure of the insurance programme being developed it can be important to consider a domicile whose regulator has the sophistication not only to fully understand the proposed programme but also to be able to provide constructive advice, engaging in open, supportive dialogue.
Seeking the right balance
Because all regulators must work within the bureaucracy of which they are a part, it is important for captive owners to incorporate their company in the most suitable environment for their particular structure and circumstances.
A large, bureaucratic system will, by definition, generate more paperwork and higher costs. A regulator operating within such a system is likely to be used to working with large corporations with staff numbers commensurate with the volume of work generated. They will probably have experience with larger and more complex programmes.
A domicile having this type of environment will also tend to produce more regulatory requirements. A smaller captive might find such an environment both challenging and frustrating; even particulars such as company licence fees in more costly domiciles can be determinative for smaller captives.
Selection of the proper domicile will be guided not only by the size of the captive but also the particulars of the captive structure. For example: are owners favouring a protected cell structure or single parent? Some domiciles have more suitable legislation for certain captive structures.
The right match means the regulator will tend to perceive the relationship between regulator and captive shareholder as a partnership. A collaboration in which the distribution of risk is evaluated, actuarial pricing is reviewed (and when questions arise, prompt clarification is obtained from the actuary), and the flow of information is constantly monitored.
In general, such a relationship will produce a predictable and consistent pattern to the decisions necessary to the development of a captive programme.
The domicile should be characterised by good laws and have suitable regulations already in place. With a conscientious and active regulator, such laws and regulations will undergo regular review. When necessary, the domicile’s administration will be open to improving legislation as executive and legislative branches work together to reach the best decisions. Often, such an environment will have an active captive insurance association.
Different domiciles, different rules
There is no substitute for familiarisation with the idiosyncrasies of the domiciles you are considering.
To cite a few domestic examples: Oklahoma is among the states having low application and licensure fees. North Carolina is known for having reasonable capital requirements as well as competitive premium tax rates. The District of Columbia has innovative and flexible captive insurance laws designed to accommodate various legal structures and operational requirements.
Offshore, the Bahamas has made a dedicated effort to ensure that its legislative and regulatory environment is proactive and recognises real business needs, especially those of new captives.
The Cayman Islands is known for its broad representation in the insurance industry, with many of the world’s leading firms having some form of local presence. The strong and durable relationship between regulators and legislators and the financial and insurance industry enables the Cayman Islands to be a proactive and forward-thinking jurisdiction.
With so many points to consider the decision may appear overwhelming. It is worth remembering that while there are subtle differences between domiciles, a common denominator is that the revenue-generating opportunities of captive insurance companies mean that onshore and offshore domiciles are both increasingly welcoming to the captive insurance market.
Lori Holford is assistant underwriter and Tania Davies is vice president of business development and marketing at Atlas Insurance Management. They can be contacted at: firstname.lastname@example.org
Lori Holford, Tania Davies, Atlas Insurance Management