Pinnacle Actuarial: Finding captives a good domicile

Daniel Linton, senior consulting actuary at Pinnacle Actuarial Resources, explains the importance of having a domicile review for new and existing products

 

Anyone who has been involved with a real estate transaction is familiar with the longstanding axiom “location, location, location”.

While it has become a cliché, it has also become the most referenced and arguably the most sensible piece of advice for those looking to invest in real estate. It is repeated three times for emphasis because it is considered one of real estate’s most important rules.

Just as real estate investors must weigh different considerations associated with a property’s location, so must captive owners weigh their own considerations associated with the potential domicile for a captive.

A strategically chosen captive domicile can have tremendous bearing on the ultimate success of any captive insurance company. Of course, there are other important considerations in forming a captive insurance company, including the captive’s structure, capital requirements and risk management strategy.

Those are key foundational matters that are addressed in any well-designed and well-executed captive feasibility study. But where the captive is domiciled can have material impact on its success, so the domicile must be carefully considered during the feasibility process.

After all, the captive will be subject to domiciliary licensing requirements and will be subject to the captive regulations particular to that domicile.

Therefore, it should be a fundamental and necessary part of any captive feasibility study to evaluate all factors and options to understand the comparative benefits (or drawbacks) of all potential domiciles.

The need for a domicile review has become more important as countries and US states and territories have committed to introducing or expanding captive laws in recent years.

We have entered a highly competitive time for the industry in which an increasing number of domiciles have laws in place allowing the formation of a captive insurance company. That means captives have more strategic options for domiciles than ever before.

As the largest and oldest global captive domicile, Bermuda was essential to the growth of the captive industry, in part because its corporate governance policies were so attractive to early captive owners. Those policies and benefits provided the foundation for the development of captive legislation for scores of domiciles globally.

The Cayman Islands’ history and growth as a captive domicile is almost as long. They have offered similar resources and similar governance policies and, like Bermuda, has expanded the resources it provides to captives looking to offshore risk.

The benefits of domiciling in Cayman and Bermuda have been obvious for decades. Thousands of captive startups have examined their options for domiciles and decided that their governance and support structure make Cayman and Bermuda a logical choice.

These countries remain a template for other jurisdictions establishing or re-establishing their captive programmes.

Those include domiciles such as Luxembourg and Guernsey, which have the most European captives, and Singapore and Labuan, Malaysia, which have the most captives domiciled in Asia.

In the US, captive insurance companies may be domiciled onshore or offshore, and the choices for domestic domiciles are plenty.

Just as there are many domicile options internationally, so there are in the US. Roughly 30 states, districts or territories have developed captive regulations.

The state of Vermont is a leader, with its long history as a captive nexus well known throughout the captive industry.

Vermont has the most domiciled captives in the US, but there are increasing numbers of states that offer similar benefits for those looking to form a captive. Delaware, District of Columbia, North Carolina, South Carolina, Tennessee and Utah are also leaders in the nation in terms of the number of captives and premium volume.

Different domiciles have different advantages and benefits. After understanding the geography of available options, the key step in a domicile review is evaluating a series of key criteria.

These factors can serve as a de facto scoring system and could be weighted based on which are established as priorities during the captive feasibility study.

The criteria that may be used in a domicile review include (but may not be limited to):

  1. Location, location, location (eg. ease of travel or costs). Some captive organisations choose convenience and ease of travel as consideration for a domicile. Others choose their home state as a means to give back to their local economy.
  2. Costs of doing business. Captives must weigh how much of their bottom line will be impacted by the ongoing regulatory structures of a domicile. These costs may or may not be substantial but, of course, any relevant costs must be reflected in the captive financial statements.
  3. Political and regulatory stability. There have been some captive domiciles that have enacted legislation establishing a captive programme management infrastructure, only to pull back from their captive programmes for various reasons. During formation, being able to project the future solidity of the domicile can avoid issues long after the captive has been established.
  4. Regulatory environment. Regulations may either support and foster a reliable business environment, or they may be overly burdensome and restrictive (even costly). Captives need to evaluate their domicile options based on this balance. Because captives continue to be on the forefront of innovation in risk management, captive owners may focus on choosing a domicile whose regulatory environment is adaptive and supportive of change.
  5. Service provider support. Older and more established domiciles understand how valuable it is to have a reliable network of service providers. Domiciles should remove impediments for captives to leverage the considerable value of these service providers.
  6. Reputation and experience. The success of domiciles such as Bermuda, Cayman, Vermont and increasing numbers of others was built on their exceptional reputation and acumen for being keyed into the needs and requirements of captives and other types of insurance companies. Reputation and experience reflect a commitment to the captive industry that cannot be overvalued.

For their part, domiciles must be aware of how well they are serving their captive constituents. Captives have more choices, options and benefits among domiciles than ever before.

This underscores how important a domicile review can be. Because each domicile offers its own unique benefits, captives can be much more affirmative about their choice of domicile.

In the past, it could be said that the choice of a domicile would be focused on how little a domicile would impose with respect to regulation. Increasingly, it may be said that the choice now is determined by how much a domicile offers.

12 August 2024
5-6 November 2025

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