Expert Commentary

Redomiciling Your Captive Insurer

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.

February 2008

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.

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