Sean Pavone
28 July 2016Law & regulation

Puerto Rico will challenge traditional domiciles: CapAlt

The sudden growth of micro-captives in Puerto Rico, particularly in the last year, means that traditional captive locations are now struggling to keep up with its various advantages, according to David Kirkup, chief operations officer and chief financial officer of Captive Alternatives (CapAlt).

The COO believes there are positive attributes to Puerto Rico that make it attractive to micro-captives, leading to its growth.

“Puerto Rico has passed some outstanding captive legislation under its international insurer rules – that afford more options and greater efficiency for managing captives,” Kirkup says.

“Specifically the segregated assets plans have opened up a unique option for US business owners who are considering a micro-captive.”

However, Kirkup believes that this positive change for Puerto Rico can create challenges for other traditional domiciles.

“Traditional offshore domiciles will suffer if they don’t up their game to address the sometimes needless expense and complexity of creating captives. In many domiciles it can take three months or more to create a captive,” Kirkup says.

“Traditional offshore domiciles will suffer if they don’t up their game to address the sometimes needless expense and complexity of creating captives.” David Kirkup

On the other hand, he believes there is still potential for micro-captives to grow, (captive insurers with annual written premiums of below $1.2 million), in all domiciles, whether through cell structures or individual entities.

“The 831(b) captive premium limit has been recently increased to $2.2 million which should also help the growth of the industry,” he says.

What will this mean for traditional domiciles?

“It should probably shake them up a bit; maybe make them less complacent about processes and requirements that have not changed much in 30 years.

“The captive insurance business is ripe for change. Domiciles should think hard about what their distinctive capabilities are, and how to appeal to US captive owners who increasingly have many more options.”

According to Kirkup, it has not always been easy for micro-captives to settle in the US territory, mainly due to cost, efficiency and concerns over legitimacy. Business owners did not see the appeal before, but with the new captives legislation that affects US captives, passed under its international insurer rules, Puerto Rico has become a more attractive place for the captive world.

Moving to the Caribbean

“CapAlt has moved all our micro-captives to Puerto Rico. We intend to domicile all our new captives there, and expect to write much larger and more complex captives, as we have no size or ownership restrictions on our structure,” says Kirkup.

“We have developed some excellent channel partnerships including major banks and state medical associations, all highly reputable partners who can help us explain captives to business owners.”

CapAlt has invested an extensive budget in the development of its infrastructure for high scalability, as well as six-figure investments in software, he adds.

“We are expecting very significant growth during the fourth quarter of 2016, the traditional busy period for new captives.”

Puerto Rico has not always been the central location for captives to grow and flourish. Kirkup says that just five to 10 years ago there were only around ‘a handful’ of micro-captives in the US territory. While there are a lot of captives across the US, micro-captives have taken longer to grow. Despite there being 250,000 US companies that might benefit from a captive, there are in fact less than 6,000 micro-captives worldwide.

“The captive industry is very fragmented,” he says. “There are a few large captive managers; Marsh and Aon at the top focused on the Fortune 1000 and scores of ‘Mom and Pop’ captive managers at the other end, with very limited capabilities for growth.

“As more business owners start to understand the benefits of managing their risks more professionally, and understand that captives are not simply a tax scheme, I would say there is enormous potential growth in this space,” he concludes.