Redomiciling Your Captive Insurer
February 2008
Choosing the proper domicile is an important
part of the initial steps of forming a captive. I have written about this in
an April 2006 article, but would now like
to address the issue of moving your captive should the chosen domicile become
unacceptable for any number of reasons.
by Michael
R. Mead
M.R. Mead &
Company, LLC
You have picked your spot, gotten to meet if not know the regulators and
local service providers, and things are going well for your captive. Then things
change. Such changes can be as varied and unpredictable and uncontrollable as
the replacement of the regulator, the regulator's boss, a change in regulation,
a change in service provider functions, or any of several other points. You
didn't ask for this, but now you have to address it with your consultant/broker/manager,
or select a new consultant/broker/manager if they are the problem.
Change in Political Climate
The political risk is the risk of regulation change. This is most prevalent
in the United States where some insurance regulators are elected and others
are appointed by elected officials. There can be a change of party in the executive
mansion or legislature and a 180-degree change in attitude about captives. The
new governor wants to appoint a new insurance director who wants to appoint
a new captive administrator. While this is less likely in the well-established
offshore domiciles, it can happen. Most of the established offshores are places
where the captive business is an important and valued part of the local economy.
The government typically doesn't want to quarrel with success.
Service Provider Changes
Service providers may increase their fees or be subject to employee changes
that directly impact the service given to your captive. They can be acquired
or merged into a firm that has a completely different approach to captive management.
Some offshore domiciles have employment regulations for nonresidents that can
cause a well-qualified account manager or accountant to be forced out of the
country, known as rollover provisions. This could also negatively impact your
service.
Other Hoops To Jump Through
At some point, when faced with these facts, you may decide to investigate
moving the captive, a process known as redomiciling or redomesticating. Not
surprisingly, it may not be a simple or speedy process.
It is true that many domiciles make it relatively easy to move to them, but
most also make it a bit more complicated to move
from them. Aside from the obvious loss of
revenues caused by a move, there is reputation in the marketplace to consider.
It is a competitive business. There may be employment issues. There will be
questions and the old regulator must be able to answer them satisfactorily.
While there are 1-page forms to move into a new domicile, there are likely none
to exit.
More importantly, however, is the establishment of known continuing liabilities
to shareholders, policyholders, certificateholders, or other stakeholders. When
a petition to relocate is filed, the regulator must consider all of these factors.
It would be wrong to allow a troubled captive to move its troubles to another
domicile. So, the case must be made that the captive has no known or suspected
outstanding issues. This would include audits having been filed for the current
period, minute books up to date, annual general meetings held as appropriate,
and all statutory matters satisfactorily concluded. All accounts and premiums
should have been paid.
If these items, and perhaps others, have not been discharged, the current
regulator may not agree to a transfer, and the new regulator may not agree to
accept the new captive. The captive must be in good standing in its current
domicile in order to relocate.
If your current service provider is part of the problem, you may need to
consider retaining another firm to effectuate the change to everyone's satisfaction.
This other firm is often a local attorney.
You will also need to advise any fronting or excess risk transfer partners
of the change. While unlikely, it is always possible that they will not be in
favor of the new domicile. This should be established early on. There are other
options if a certificate of good standing cannot be obtained. It is possible
to open a new captive in another domicile and just run off the older captive.
It can be deprived of premiums if the loss picture is known and controllable.
That would then cause it to wither and expire.
In any event, as always, it pays to plan your move and to think through the
possibilities.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.