We explore the factors behind the uptick in re-domestications of US-parents’ captives to US state domiciles.
In the fledgling days of the captive insurance industry, the most rational conclusion for a parent company was to domicile their captive in the most well-established, well-regulated, and appropriate domiciles available. Early on the likes of the Cayman Islands, Bermuda, and Barbados were favoured by all captives, irrespective of the parent company’s geographic origins. These domiciles remain world-leading to this day, equipped with the wealth of expertise, regulation, and structuring options. According to Captive Review’s recent world domicile update, the aforementioned domiciles ended 2020 with a total of 652, 692, and 278 single-parent captives respectively.
However, with ever increasing optionality for US captive owners as more US states move to implement their own captive insurance legislature – electing to facilitate an industry which helps create jobs and bolsters the economy – there has been a recent uptick in US parent companies electing to re-domesticate their captives in time-honoured offshore domiciles back to newer US state-based domiciles. In this vein, there has also been a flurry of state to state re-domestications.
Offshore to onshore
The ever increasing complexity of regulatory requirements in offshore domiciles, are causing some US entities to re-domesticate their captives onshore. The onerous obligations of Solvency II and the anti-money laundering requirements, for instance, simply do not apply to US-based parent entities.
“The issue is the heavier regulation offshore, and this is not because of the domiciles themselves, but because of all the pressures they’re facing,” Pete Kranz, executive managing director, captive practice leader, Beecher Carlson said.
“Bermuda and Cayman are fantastic domiciles. The pressures being faced in those and any other offshore domicile are because of external factors including dictates from the OECD, for instance, which could be relevant to captives owned by companies in other jurisdictions, but they’re getting applied to all captives in those offshore domiciles. And some of those captives are owned by US companies that don’t have those same issues.”
Beyond the increasingly challenging regulatory reporting obligations faced by captives domiciled offshore, other reasons for re-domestication onshore appear to be more straightforward but no less important with respect the smooth oversight and operational elements surrounding an entity’s captive.
Christine Brown, assistant director of captive insurance, Vermont Department of Financial Regulation, noted that in 2021 Vermont approved four re-domestications of licensed captives, and six in 2020. Five of these re-domestications over the past two years originated from offshore domiciles.
“There are many reasons for a captive to re-domesticate. In general, Vermont’s balanced approach to captive insurance regulation tends to attract both new and existing captive owners,” Brown said. “We’ve heard generally the optics of having an on-shore vs off-shore captive is one of the reasons companies are choosing to re-domesticate back to the US.”
In response, Dave Tatlock, CFO, Strategic Risk Solutions, added: “With all that said, our firm’s growth in Cayman, Bermuda and Barbados has remained strong, and these and other offshore domiciles continue to do well.”
State to state
Since enacting captive legislation in 2013, North Carolina has become one of the leading US state domiciles. Of the state’s current 368 captives, 78 have been re-domestications. All of these re-domestications have either come from seven other US states and seven offshore domiciles.
North Carolina has had processes in place at the outset which have streamlined the re-domestication process for captives wishing to licence in the Tar Heel state. The following factors have likely added to the state’s popularity for onshore re-domestication. If, for instance, a captive choosing to re-domesticate has a current business place, and the likes of bios and agreements already on file with their current regulator, North Carolina will accept that information. This greatly streamlines the re-domestication application and mitigates the need for this information and more to be presented again in a revised format.
Debbie Walker, senior deputy commissioner, Captive Insurance Companies Division, North Carolina Department of Insurance, further explained: “Our state has an online filing system that is used for both re-domestication and new formation applications. The system allows the user to answer the application questions and upload documents to the system as that information is available. The information may be saved so that the application may be continued at a later date. Once the application is complete, it is submitted electronically through a system that is more secure than email.”
Furthermore, in May 2021, North Carolina’s house passed legislation to incentivise captives to choose NC as their state of re-domestication. The legislation’s aim, strongly supported by the industry, passed 49-0, and offers captives that redomicile to North Carolina the benefit of a two-year premium tax holiday.
Commenting on the legislation, Walker said: “We are hopeful the legislation will entice business owners to move their captives to North Carolina and participate in the benefits the North Carolina captive industry has to offer.”
US onshore domiciles such as North Carolina now have captive laws that allow for the formation and operation of captives and are providing a desirable environment for the operation of captives, captive owners are finding it advantageous to re-domesticate their captives back to a US domicile and no longer see the need to form their captive offshore,” Walker added.
Aside from the broad range of onshore domicile options and rising competition, direct placement tax is a more recent consideration for US entities and their state domicile selection.
On state-to-state re-domestications, Kranz said: “Onshore, re-domestications often come down to a surplus tax lines issue and if states become more aggressive with this direct placement tax. This issue has arisen since the Non-admitted and Reinsurance Reform Act (NRRA) in 2010, which essentially pulled captives into surplus line’s tax. And this has become a big factor when we are advising on domiciles. For any captive that was already established, it had become a factor of looking at the previous domicile and saying, should we be in our current domicile or should we consider re-domesticating?”
Providing her views on the re-domestications being seen in Tennessee, Belinda Fortman, director, captive insurance section, Tennessee Department of Insurance, commented: “The motivation to be offshore has decreased with the tax law changes and growth onshore of the number of captive domiciles, increasing the opportunity to operate in one’s ‘home state’. The re-domestication activity to Tennessee reflects this, with having several captives move ‘home’, also reflecting our reputation as a business friendly and experienced regulatory team.”
Beyond favouring a state’s ability to accommodate their captives, expediency is evidently another factor for some captives.
“A large captive owned by International Paper re-domesticated from Vermont to Tennessee last December as their head office is in Memphis and they had confidence in our ability to serve as their captive regulator,” Fortman said. “So, for us, it is more a movement towards Tennessee, than a movement away from other domicile options.”
Offshore domiciles regularly amend their reporting obligations and requirement. Given some of the most onerous do not apply to US parent companies, Captive Review believes the re-domestication trend will continue.
Either from offshore domiciles or between state domiciles, re-domestications look set to continue in step with the volume or state domiciles and the continued evolution of individual state captive laws.
While the desire for a captive to re-domesticate is driven by several key factors discussed in this article, the landscape for US captive re-domestications may simply be driven by the unique benefits given state domiciles can off their captive clients.