Choosing the Right Captive Domicile
August 2002
In this article, Michael Mead discusses captive
domiciles, their importance and what factors to consider when selecting one.
by Michael
R. Mead
M.R. Mead &
Company, LLC
In this issue I would like to discuss domiciles, their importance and how
to choose one. Each captive must be legally, and perhaps physically, located
in a specific geographic entity with a recognized government. This place is
called the domicile.
There are over 100 domiciles in the world, but most are not worth a general
discussion. For the purposes of this article we will chiefly consider domiciles
for U.S.-based parent organizations.
What does one look for in choosing a domicile? I would suggest the following
points:
- Political stability
- Enlightened regulation
- Access
- Support services
- Cost
First of all, when a U.S.-based entity chooses a domicile, the initial decision
is onshore versus offshore. This means siting the company inside the United
States or outside the United States. There are many reasons to eliminate a particular
choice. One that arises early is called patriotism. Without offending those
who are zealous in their defense of all things American, as am I, I would point
out that five of the last six Louisiana Insurance Superintendents have served
time in jail for insurance-related violations.
If you are troubled by choosing an offshore domicile, then by all means choose
a U.S. domicile. There are many good ones that will likely meet your needs.
For most people there are other reasons used to make a decision, and those are
the audience for this piece.
Political Stability
Political stability means an analysis of the support for captive enabling
legislation and enlightened regulation that can be identified as being present
in all major political parties vying for control of the government. This applies
not only to offshore domiciles, but also onshore. If the Democrats have promoted
captives, and appointed a big Democrat donor as Insurance Superintendent, and
the Republicans win the next election, things may change rapidly, and not for
the better.
Obviously this applies to offshore domiciles too. It has happened that control
of the government changes, and the new guys sometimes view captives as exploitive,
and wish to tax and over-regulate them. The Bahamas was at one time a major
domicile. The government changed, and captives did not care for the new laws.
The captives left.
Enlightened Regulation
Enlightened regulation is my term for regulation that adequately and professionally
addresses the issues of the character, capacity, and capital of the organizers
and managers of the captive to perform their responsibilities and competently
manage their business. No risk-sharing partner, for fronting or reinsurance,
will be willing to work with a captive that is domiciled in a territory where
there are no regulators, or the regulators are deemed not competent. The risk
sharing partner wants to be assured that some governmental official with skill
and experience is looking over the shoulder of the captive, so to speak. Such
oversight constitutes another set of eyes and ears for the primary underwriter
and risk taker.
However, if this regulation becomes burdensome for the captive owner/manager,
then the captive may feel forced to weigh other options. Striking the proper
balance is key, and is difficult. Most major domiciles have individuals who
have been able to strike that proper balance.
A key point to use when evaluating a domicile is the budget appropriation
to the Department for captive promotion and regulation. If there are no funds,
then there will be no people. If there are no people, the domicile is not serious,
and is not a real domicile. A very real part of regulation is promotion of the
benefits of establishing your captive in a particular domicile. This promotion
requires people and travel and expenses. If the legislature chooses to reduce
or eliminate or never fund such expenses, the captive in that domicile will
be frustrated and short-lived.
Access
As most captive domiciles require an annual meeting in the domicile, access
to that domicile is a consideration. Some people do not care for long airplane
flights. Many captive owners have pressing schedules and do not wish to spend
an inordinate amount of time traveling for a captive meeting.
Some captive owners relish and anticipate visiting their captive domicile
and constructing a vacation around the captive meetings. While many say that
such softer points are not important, in my experience, they are more important
that most will admit. Smokers do not want 4-hour plane rides. Nongolfers do
not wish to spend time at a golf resort. No one wants to be marooned on an island,
by any definition, unable to leave when one wishes, or in a convenient mode.
Support Services
Support services are those ancillary but necessary or even required services
that the captive must purchase. These include a domicile manager, an actuary,
an attorney, an accountant, or even a banker. All of these must be arranged,
and there will be regular interface. If each service provider is in another
physical place, and time zone, the coordination can be aggravating.
The domicile manager is that firm that keeps the books, contracts, and records
of the captive. In some domiciles, this person acts as the first line of defense
for the regulators. In almost all cases, they must be local and known to the
regulators.
The other service providers may be of your own choosing, but some domiciles
require that the attorneys, accountants, actuaries, and so forth be formally
recognized and perhaps even have an office in the domicile. Such a requirement
may demand extensive inquiries into the local providers' qualifications, competence,
and fit with your company.
Cost
The most obvious cost is the minimum capitalization requirement of the domicile.
These vary a bit, but not greatly. They will range from as little as $120,000
to $1 million. Additional costs will include annual fees, payments of bureaus
and boards of review, the annual meeting, if required in that state, and Federal
Excise Tax.
The purpose of a jurisdiction electing to become a domicile is to promote
jobs and increased tax and fee revenue. Many domiciles require the domicile
manager to report periodically on the amounts of money spent on meetings held
in the domicile. These revenues become critical at budget time.
All of the above factors should be considered when considering your domicile.
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