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How to Choose a Domicile That Works Best for Your Captive

Michael Mead | April 1, 2006

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In the following space I will attempt to shed a little light on how I view the process of selecting a domicile for establishment of your captive. This has been written about previously, but the times continue to call for reconsideration of our fundamentals. With so many new choices to make, it behooves one to go back over the essentials.

Recently, the State of Alabama Insurance Commissioner announced that the Alabama legislature is preparing enabling legislation so that Alabama can become a captive domicile. By my count, that will be 27 states, more or less.

This action causes many in our little corner of the world to wonder why? Does the alternative risk transfer (ART) market need another domicile? The regulation of captives has become a very competitive business. Is this a good thing?

Points to Consider

There are several considerations which must begin, as always, with a clear articulation of the goal of establishing the captive. This is the starting point to evaluate which jurisdiction will provide maximum benefit.

In the not too distant past, the first question to the proposed captive owner was, "Do you want to ski, golf, or scuba?" Those choices being of course Vermont, Bermuda, or Cayman. Some still make the choices on that basis, and "soft" reasons are not all bad to use as the basis for choice.

If you are inclined to consider "harder" reasons for choosing a domicile allow me to raise four key points for your consideration. These are:

  • Quality of regulation
  • Political stability
  • Availability of support services
  • Tax considerations

Actually, one of the first steps is to decide if the captive will be onshore or offshore, but surprisingly to some, that choice does not affect any of the four main points but one. In the past it was believed by many that there were tax advantages to locate outside of the United States, and there were advantages in some cases. Most of those advantages are gone. But tax considerations are the fourth point on my list, and the onshore/offshore decision is the main driver there.

My first criterion is to locate regulators that understand what you wish to accomplish and support that goal. Not every domicile or every regulator views a proposed captive the same way. As you probably hope to be in a domicile for a long time, choosing a regulator with whom you are comfortable is critical. Some of the offshore captive regulators are experienced and seasoned.

My second criterion is the political climate. This applies primarily in the United States. The established offshore domiciles are highly unlikely to upset the applecart. An individual state regulator can cause upset through a state's political process, potentially leaving the captive owner in a bind.

The third criterion is the availability of supporting service providers. If your captive is one which will require active management, occasionally urgent discussion with legal counsel and close proximity to accounting and actuarial personnel, it would be great if they were nearby. Few captives can operate successfully without knowledgeable outside support services.

Which brings me back to the fourth criterion—taxes. Obtaining a tax advantage should never be the reason for establishing a captive. That said, the prudent owner will consider the tax situation. While little advantage can be gained from an offshore domicile, there may be some particular advantages for your specific situation if studied carefully. In addition, not all onshore domiciles use the same tax practices, and one state in fact has no taxes on the captive or its income.

Above all else, while it may not be a "hard" reason, you should enjoy going to the domicile. You will have to attend some meetings there, so you may as well enjoy it.

Returning to the original discussion about the new domiciles such as Alabama, Ohio, New Jersey, Delaware, and all of the existing domiciles, the question is how will they be viewed under my criteria, or yours? What is their reason for being? Why would you place your business there? Better golf? Better skiing? Nicer people?

Sophistication and Stability

On the first criterion of regulation, sadly there are not that many of us professional captive geeks around. Finding a regulator truly knowledgeable about captives is easier said than accomplished. A regulator who has been handling personal auto for 20 years is probably not a great candidate. Captives are very different, and require a regulator who understands that, and can communicate effectively with the head of the department and the legislature.

The same applies to service providers. While there are many lawyers and accountants around, not many understand captives and their special needs. Certainly, major firms are unlikely to open offices in every domicile. The same can be said for captive managers.

As to political stability, it must be noted that legislators who are expecting short-term positive cash flow from becoming a captive domicile will be disappointed. When they become disappointed, they may lose interest in passing legislation necessary to keep their state competitive.

In considering these new domiciles, there may be solid business reasons to choose a particular one, but be mindful of the basic criteria to achieve success.

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