Domicile Selection

Choosing a domicile for the captive is an important consideration in any feasibility study.  Factors to consider are the economic and political stability of the jurisdiction, tax and regulatory environment, local employment issues and the quality and quantity of service providers such as insurance managers, auditors and legal counsel.  Geographical proximity, time zone considerations and languages spoken in the jurisdiction are also relevant.  It is important to ensure that the chosen domicile has an infrastructure to enable, allow for and support the effective operation of an insurance company.

The captive insurance marketplace is a worldwide business endeavor.  For companies located in the United States, there are a number of states that have insurance statutes for captive companies.  These states include, but are not limited to, Utah, Nevada, Arizona, Vermont, Colorado, South Carolina, District of Columbia, and Hawaii.  While captive incorporations occur in these and other states, there are regulatory and financial requirements that exist within states that do not exist in many of the foreign domiciles.

Offshore Domiciles

The bulk of the growth in captive incorporations is occurring offshore.  Such growth is attributable to a number of factors.  The initial capitalization requirements are generally less, the company incorporation fees and time requirements are generally less, and the insurance regulators in many offshore locations, understand and support the innovative thought that goes into a captive company.  Each offshore domicile has requirements that differentiate that particular location, but the Caribbean has grown dramatically in a number of areas that approve captive companies and welcome them from a business perspective.  The largest venue for captives is Bermuda.  Other growing venues in the Caribbean include the Cayman Islands, the British Virgin Islands, and Barbados.

Having experience in several of these venues, Alta recommends the British Virgin Islands.  This jurisdiction tends toward the pragmatic in terms of regulation of the primary Caribbean locations.  The regulations do not require captive board meetings to be held on the island.  They do not require any funds to be deposited on the island, and they do not require local attorneys, accountants or actuaries.

The BVI Insurance Act combines the best of the British Commonwealth acts, and they have the most progressive set of regulations with the least bureaucracy.  

The requirements for resident professionals are different in each locale.  For instance, in the Cayman Islands, the site manager is much more active (also much more expensive).  Counsel may be based in the United States, but must travel to the Caymans to conduct certain portions of the business of the captive.  You must use a local Cayman bank and banker for at least a portion of your transactions.  In addition, the CPA has to have an office in the Cayman Islands, and be approved by the regulator.

Domestic Domiciles

There are a number of states that permit (and, indeed, encourage) the formation of captives with a relatively small amount of initial capital (as little as $250,000). However, as a licensed captive, this entity may be subject to compliance with rules and regulations of the National Association of Insurance Commissioners (“NAIC”).   

The NAIC has a set of constantly changing and complex regulations with respect to the amount of minimum capital (“risk-based capital”), and the basis for calculating reserves for future liabilities (“statutory accounting”).  Since the NAIC is primarily concerned with solvency (as opposed to earnings) of insurance and reinsurance companies, rules for capital requirements and statutory reserve requirements can be onerous, and are generally significantly higher than what may be required by rating agencies.  The initial and ongoing reporting requirements (such as filing of annual statements) can be onerous as well.  The licensing process can be lengthy, and can require significant personal information from shareholders, directors and officers.

Of the domestic domiciles Arizona, Utah, Nevada and Vermont are considered to be attractive for captive insurance companies. While there are certain local requirements, these states do allow for more pragmatic captive management.

Having considered the timescale involved in establishing a captive insurance company, the initial premium volumes and the pragmatism of doing business, Alta concentrates its attention on Utah and the British Virgin Islands.