Expert Commentary

Captive Domicile Selection Issues

With the enabling legislation passed in the state of New Jersey, there are now some 30 U.S. captive domiciles. While not all are particularly active, the stage has been set for competition. In this article, I will look at some of the issues and opportunities in domicile selection.


Captives
April 2011

I have reviewed domicile selection in this column previously, but things have changed as more state legislatures and insurance departments view captives as new sources of revenues in these tough economic times. No regulator would publicly admit to competing for business, but the competition has ramped up.

Captive Domicile Selection Factors

The two preeminent factors for domicile selection remain: the legislation itself, i.e., what is permitted, and the regulators—their knowledge and willingness to work with the captive community. Now, however, it is time to examine more closely some of the other underlying factors that can separate the "good" domiciles from the other.

A new key factor is time, and another is cost. Until recently, the time for licensing and the cost of establishing the captive have been pretty comparable in all domiciles. There are variables for attorneys, actuaries, and domicile fees, but the variance has always been in tolerable ranges when viewed through the big-picture lens of obtaining greater control over one's risk dollars.

Cost

Now, when drilling down into the details, one is first struck by the reduced or nonexistent premium taxes in two domiciles and by the wide variance in cost of local service providers. It is inexplicable how the cost of the legal work to set up a captive can vary from essentially nothing in the Cayman Islands to over $25,000 in some domiciles, and with practically every level in between. While the domicile regulations and corporate laws may differ, it strains one's analytical prowess to believe that such variances are justified.

Increasingly prospective captive owners are considering these facts. Why spend $25,000 in legal fees in domicile A for a pure captive when you get one in domicile B for $5,000 in legal fees?

Time

Also, today time is more of a factor. Once upon a time, the captive was established as part of a larger risk program built around the expiration of existing policies. Today, you are as likely to see start-ups driven by an urgent need for coverage to address a specific pressing financial or regulatory challenge as you would the former. As always, time equals money. If the service providers and regulators cannot move quickly enough, the cost will rise.

Lack of Experienced Professionals

Some of the variance is driven by the lack of attorneys who are well versed in the nuances of captives. Even more is driven by the lack of such attorneys, leading to a "closed" market in some domiciles. The choice of knowledgeable providers may be limited.

The same observation can be made just as pointedly with actuaries, accountants, and domicile managers. Yes, there are different standards and practices for each profession and widely varying costs of just being in business. But, at the end of the day, while Len Crouse's maxim, "If you've seen one captive, you've seen one captive," is still valid, the differences are often in the eye of the beholder and not of sufficient substance to cause radical differences in costs.

Unfortunately, in other cases, the providers are a stable used consistently by the formation person, and the true cost of the work can be a bit vague.

Upon a closer examination, it is often found that today inexperienced regulators and inadequate domicile practices and procedures subtly add to the costs. If the attorney or domicile manager must instruct a regulator in the fine points of captive licensure, then the cost will go up. The regulator's response of, "Thanks, we'll get it right next time" can translate into another $500 or $1,000 cost from your counsel, manager, or actuary.

When the domicile uses incorrect forms, and everyone realizes it but the domicile regulator, there will again be a "cost event" while the issue is resolved delicately but decisively.

Conclusion

These observations should not lead the captive owner to respond negatively, however. If, for no other reasons, the decision is made to go to a particular domicile, then the providers must treat the regulator with respect while working to resolve the conflicts and keeping all players believing that they won and are right.

As always, it pays to do your homework and work with well-qualified professionals. Now, there are additional reasons to do so.


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.

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