Finding the Domicile That Best Fits Your Captive Insurer

It may seem strange to compare a sophisticated risk management tool to a new pair of shoes, but there are some real parallels between choosing the right captive domicile for an organization and wandering through a shoe store in search of the perfect pair.

You know you'll own those shoes for a while, so you want to invest the time to ensure they'll be completely comfortable over the hundreds of miles you'll walk in them. Do they go on easily, or do they require extra work? Do they stretch to meet the varied needs of days in the office or racing to get to your gate at the airport? Will they help you navigate uneven or unexpected surfaces? Will they make or break your outfit? 

Just as you wouldn't walk out of the shoe store with the first pair you spotted, a company shouldn't choose a domicile without a thorough evaluation of all the financial, strategic, and operational elements that may affect your organization.

Those interested in establishing captive insurance companies have an ever-increasing number of domiciles to choose from. There are roughly 70 choices worldwide, about half of which are in US states. Some domiciles, like Vermont, have long been home to the captive insurance industry and continue to update legislation to meet the changing needs of the insurance marketplace. Newer domicile arrivals see the economic benefits of enacting captive legislation through licensing fees, premium tax revenues, and potential tourism dollars.

Because no two domiciles offer identical mixes of requirements, regulations, and other factors, the starting point is a comprehensive comparison analysis built around the organization's goals and objectives. When a captive consultant conducts a domicile analysis for clients, they begin by looking at the organization's business structure, specifically the nature of its current operations and exposures, while being mindful of the company's growth strategy and how it could affect the proposed captive insurance company.

For example, the organization might be a manufacturer based in a US state, performing most of its business activity domestically while also maintaining significant manufacturing activities in non-US markets. Depending upon the company specifics, they might discuss a non-US domicile. 

The next step is examining the financial considerations associated with the choice of domicile to ensure it's in line with both the organization's expectations and comparable to similar domiciles. The financial considerations include all capital and surplus requirements, flexibility with investment portfolios, premium taxation, income tax, excise tax, costs to operate in the domicile, fees, and travel for board meetings. Certain domiciles in the European Union are subject to Solvency II regulation; thus, the costs of establishing and maintaining captives there may be significantly higher for some organizations compared to their US equivalents. For example, if you're based in the United States and don't operate globally, legislative improvements to US captives have erased many of the one-time advantages of making an offshore domicile choice. 

The strategic piece of the process focuses on the nature and philosophy of the domicile's attitudes toward captive insurance. Is the domicile new to captive insurance regulation? What is its reputation amongst the captive industry? Does it have significant experience with captives in your industry? How long will it take to get a license? Do its regulators provide an easy runway for adding new lines of business to a captive insurer? And just how stable is the regulatory environment itself?

Operational considerations include understanding the domicile's characteristics and practical aspects. How frequently are examinations conducted, and what is the process? Is filing financials straightforward? Can you work remotely with the domicile, or is a resident director required? Are there unique accounting requirements beyond standard practices? Does the domicile support timely approval of changes to the captive insurer's business plan? Is an annual in-domicile meeting required? Ensure your tax and legal counsel are involved in these discussions.

That last issue is frequently a major consideration. While it may be tempting to choose a domicile requiring in-person meetings because it justifies regular travel to a sunny or scenic locale, keep in mind that you're locking your organization into having to do that year after year. Based on the captive consultant's evaluation, the domicile that is the best fit for your company may not match your desired travel destinations due to the financial, operational, and strategic results. 

Finally, as with shoe shopping, should you decide you purchased the wrong pair of shoes, you can always exchange them for another. Similarly, you can later decide to change your captive's domicile through a process called redomestication. Most of the time, that process isn't particularly complex, but it does involve cost, time, and other hassles you'd probably prefer to avoid. Better to invest the time and effort into making the right choice up front!