In this issue I would like to discuss domiciles, their importance and how to choose one. Each captive must be legally, and perhaps physically, located in a specific geographic entity with a recognized government. This place is called the domicile.
There are over 100 domiciles in the world, but most are not worth a general discussion. For the purposes of this article we will chiefly consider domiciles for U.S.-based parent organizations.
What does one look for in choosing a domicile? I would suggest the following points:
- Political stability
- Enlightened regulation
- Access
- Support services
- Cost
First of all, when a U.S.-based entity chooses a domicile, the initial decision is onshore versus offshore. This means siting the company inside the United States or outside the United States. There are many reasons to eliminate a particular choice. One that arises early is called patriotism. Without offending those who are zealous in their defense of all things American, as am I, I would point out that five of the last six Louisiana Insurance Superintendents have served time in jail for insurance-related violations.
If you are troubled by choosing an offshore domicile, then by all means choose a U.S. domicile. There are many good ones that will likely meet your needs. For most people there are other reasons used to make a decision, and those are the audience for this piece.
Political Stability
Political stability means an analysis of the support for captive enabling legislation and enlightened regulation that can be identified as being present in all major political parties vying for control of the government. This applies not only to offshore domiciles, but also onshore. If the Democrats have promoted captives, and appointed a big Democrat donor as Insurance Superintendent, and the Republicans win the next election, things may change rapidly, and not for the better.
Obviously this applies to offshore domiciles too. It has happened that control of the government changes, and the new guys sometimes view captives as exploitive, and wish to tax and over-regulate them. The Bahamas was at one time a major domicile. The government changed, and captives did not care for the new laws. The captives left.
Enlightened Regulation
Enlightened regulation is my term for regulation that adequately and professionally addresses the issues of the character, capacity, and capital of the organizers and managers of the captive to perform their responsibilities and competently manage their business. No risk-sharing partner, for fronting or reinsurance, will be willing to work with a captive that is domiciled in a territory where there are no regulators, or the regulators are deemed not competent. The risk sharing partner wants to be assured that some governmental official with skill and experience is looking over the shoulder of the captive, so to speak. Such oversight constitutes another set of eyes and ears for the primary underwriter and risk taker.
However, if this regulation becomes burdensome for the captive owner/manager, then the captive may feel forced to weigh other options. Striking the proper balance is key, and is difficult. Most major domiciles have individuals who have been able to strike that proper balance.
A key point to use when evaluating a domicile is the budget appropriation to the Department for captive promotion and regulation. If there are no funds, then there will be no people. If there are no people, the domicile is not serious, and is not a real domicile. A very real part of regulation is promotion of the benefits of establishing your captive in a particular domicile. This promotion requires people and travel and expenses. If the legislature chooses to reduce or eliminate or never fund such expenses, the captive in that domicile will be frustrated and short-lived.
Access
As most captive domiciles require an annual meeting in the domicile, access to that domicile is a consideration. Some people do not care for long airplane flights. Many captive owners have pressing schedules and do not wish to spend an inordinate amount of time traveling for a captive meeting.
Some captive owners relish and anticipate visiting their captive domicile and constructing a vacation around the captive meetings. While many say that such softer points are not important, in my experience, they are more important that most will admit. Smokers do not want 4-hour plane rides. Nongolfers do not wish to spend time at a golf resort. No one wants to be marooned on an island, by any definition, unable to leave when one wishes, or in a convenient mode.
Support Services
Support services are those ancillary but necessary or even required services that the captive must purchase. These include a domicile manager, an actuary, an attorney, an accountant, or even a banker. All of these must be arranged, and there will be regular interface. If each service provider is in another physical place, and time zone, the coordination can be aggravating.
The domicile manager is that firm that keeps the books, contracts, and records of the captive. In some domiciles, this person acts as the first line of defense for the regulators. In almost all cases, they must be local and known to the regulators.
The other service providers may be of your own choosing, but some domiciles require that the attorneys, accountants, actuaries, and so forth be formally recognized and perhaps even have an office in the domicile. Such a requirement may demand extensive inquiries into the local providers' qualifications, competence, and fit with your company.
Cost
The most obvious cost is the minimum capitalization requirement of the domicile. These vary a bit, but not greatly. They will range from as little as $120,000 to $1 million. Additional costs will include annual fees, payments of bureaus and boards of review, the annual meeting, if required in that state, and Federal Excise Tax.
The purpose of a jurisdiction electing to become a domicile is to promote jobs and increased tax and fee revenue. Many domiciles require the domicile manager to report periodically on the amounts of money spent on meetings held in the domicile. These revenues become critical at budget time.
All of the above factors should be considered when considering your domicile.
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