The Value of Captive Domiciles
When forming a captive insurance company, many decisions can have a significant impact on the captive’s operations. One of the most important is which domicile the captive owner selects to apply for licensing and ongoing regulation of the captive.
United States-based companies wishing to form a captive have many options in this regard. In addition to evaluating their own goals and priorities, companies review several strategic factors when choosing a captive domicile, including:
- Costs of doing business in the domicile
- Political and regulatory stability
- Rigor of the regulatory environment
- Considerations related to the domicile’s location (e.g., ease of travel or costs)
- Service provider support
- Reputation and experience of the domicile
For U.S. insureds, a captive insurance company can be domiciled within the U.S. (an onshore captive) or outside the U.S. (an offshore captive).
If choosing to domicile a captive onshore, there are a plethora of options – more than 30 states, districts and territories are captive domiciles. Vermont, for instance, was the second state to enact captive legislation in 1981 and has been a leading captive innovator. They have consistently been the largest U.S. domicile and are considered the gold standard for others to emulate. By number of captives and premium volume, additional leading U.S. domiciles include Delaware, District of Columbia, North Carolina, South Carolina, Tennessee and Utah.
Beyond the U.S., Bermuda remains the largest and oldest modern global captive domicile, with the Cayman Islands following close behind. Both Bermuda and the Cayman Islands are recognized industry leaders with a large pool of available resources. Both of these domiciles have hundreds of offshore captives insuring U.S.-based risk. Other global domiciles with a large captive presence include Singapore and Labuan, which currently lead the number of captives domiciled in Asia, while Luxembourg and Guernsey lead the number of European captive domiciles.
One option for U.S.-based companies electing to choose an offshore domicile is to make a 953(d) tax election, which allows captive insurance companies to still be taxed as U.S. taxpayers.
The captive industry continues to evolve, and domiciles must continue to be supportive and adapt in turn, or they will cease to be a domicile of choice. Domiciles such as Arizona, the Bahamas and Kentucky have all had great success, but ultimately faded for a variety of reasons.
Domiciles need to adapt to stay competitive and provide support to their captives. Even an industry leader like Vermont is consistently reviewing legislation. Just this past May, Vermont made updates to its captive laws, which included allowing captive insurance companies to enter into parametric risk transfer contracts, providing more flexibility to fit companies’ coverage needs.
Captives should choose a domicile that aligns with their goals – and the long-term financial and operation benefits can be substantial. There are unique characteristics to different domiciles that might attract captive owners, such as different tax or dormancy laws, or significant experience with a particular line of business. The best fit for one captive might not be the same domicile as another captive.
The gap between the benefits of offshore versus onshore domiciles (and also between the many onshore domiciles) is narrowing. Fierce competition, especially between U.S. domiciles, is attracting new captive formations. In addition, we are seeing both North American offshore and onshore domiciles continue to grow as the insurance market continues to harden. In a strong captive market, most (if not all) domiciles will see growth and new captive formations. It will be interesting to watch the growth of captive domiciles continue over the next few years as the industry continues to evolve.