Expert Commentary

Captives: Domicile Shopping

The selection of an appropriate domicile has been covered previously in these pages but is worth another visit as the tempo of searching about for the perception of better treatment has quickened.

August 2008

The process by which one chooses the most favorable domicile for a captive often involves geography, ease of travel, existence of support services, political tranquility, entertainment options, and the preferences of regulators. This process can be involved, detailed, and analytical. Or it can be driven by the CEO's favorite vacation spot. Any of these reasons are legitimate and usually result in a favorable outcome.

New Considerations

In recent months it has become more necessary to add some new considerations to the list. The matter of regulatory concern in the past has focused on the attitudes of the regulators in regard to certain lines of business and certain classes of business. Some regulators don't like risks with wheels on them. Some don't like anything that someone could construe as personal lines. Some don't care to become involved in anything with automobile dealers or warranties. While these traits may be frustrating to some captive owners, they are legitimate to the regulators and known to the captive practitioners. They are predictable, and they so can be managed.

Lack of Qualified Personnel

Now there seems to be additional regulatory concerns. The first is the thinning ranks of qualified captive regulators. With the retirements of imminent persons such as Len Crouse in Vermont and Mary Lou Gallagos in Cayman, there are few seasoned, strong voiced regulators left to speak up in defense of the unique regulatory requirements of captives. And it is clear that captives as proposed in the United States still need thoughtful, vigorous defenses against regulatory bodies and quasi-regulatory bodies that neither understand captives and their purposes/value nor care if captives continue to supply jobs and tax revenues.

There are open jobs that are not being filled, and there are few eminently qualified candidates willing to engage in the field for remuneration which is not attractive. Coupled with budgetary restraints faced by some domiciles, if not all, the real risk is that these important posts will either go unfilled or be filled by unqualified candidates. This will work to the detriment of both the domicile and the industry. A warm body with credentials is not the same as a person who appreciates the value of captives and will work hard to preserve their role in risk transfer.

NAIC Accreditation

The second new concern, which may be more serious and long lasting, is the approach to handling the pronouncements of the trade association for insurance regulators, the National Association of Insurance Commissioners (NAIC). This association has no official powers or rights. It is voluntary in theory. It holds to its considerable non-official policing powers through its process of accrediting a state as to the state's qualifications and processes in regard to the NAIC's self-promulgated rules.

Accreditation by the NAIC means that an entity doing business with an insurer regulated elsewhere can theoretically rely on the home state's regulation of the entity. Withholding accreditation can theoretically have quite serious consequences if an entity doing multistate business must submit to individual regulation on a state-by-state basis. Accreditation in this sense is logical, helpful, and probably necessary.

The process for accreditation involves a thorough examination which will result in recommendations for change and improvement, to be paid for by the examined state's citizens. This examination occurs in each state, on a rotating basis, every 3 years.

The practical consequence of this process, which is now being seen in the captive world, is that state departments of insurance that are "up for exam" become completely absorbed in preparing themselves, their staff, and files to "pass the exams." So, if a state that is being considered as a domicile for your captive is "up for exam" in the next 12 months and your application is a bit on the edge, consider another domicile—purely because of the fear of the NAIC triennial exam.

Likewise, if the domicile that hosts your captive is being examined and begins to demonstrate some unfriendly attitudes in hopes that your captive will disappear, you may have to consider a move. In more tranquil times, redomiciling a captive is a regulated process with certain steps and information to be provided, reviewed, and approved. During an exam, this process may be smoothed in order to get you off the regulator's books and keep the NAIC happy.

Working Around the Triennial Exam

All of this brings us to the new considerations for choosing a domicile: "When is the triennial NAIC exam?"

This consideration may surprise or amuse some captive professionals, but it is a real and growing aspect of our world. If your captive is one that is encountering regulatory rigidity, and the responses to your inquiries have not been satisfactory, you or your captive adviser should check the NAIC triennial exam calendar. If your domicile is on the list for the near future, you may wish to meet with your regulator and ask if the files for your captive meet with their approval and that all aspects are in good order. You might consider offering any assistance in working with the regulatory staff to bring your files up to NAIC requirements.


While reshaping your captive to the satisfaction of the NAIC, a group supported by the traditional market insurers, may be vexing, your regulator likely will appreciate the cooperative, helpful attitude. You may wish to fight back against some requirements, but in today's resource-poor environment for captive regulators, your better target is legislators rather than your regulator.

Redomiciling will arise as an option and it may indeed by a wise choice, but bear in mind that the next domicile will also soon suffer the triennial exam and likely display some of the same rigidity. This raises the obvious question, "Does the NAIC apply to offshore captives?" I believe the answer is "No."

As always, it benefits your captive to know your regulators well and to keep up to date on matters in your domicile affecting your captive—because it is your money at stake.

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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