In a continually evolving captive insurance marketplace, the decision to select the most advantageous domicile for the captive is becoming increasingly difficult as more and more states adopt captive legislation. Gone are the days where the only obvious domicile choice was Vermont or the Cayman Islands. Instead, we are seeing “home state” domicile selection driving captive growth throughout the United States.
What’s driving this change?
With the passing of the 2010 Dodd-Frank Act and certain state-specific tax positions, an increasing number of onshore jurisdictions are enacting captive legislation to promote business within their state. This is a key driver behind the increase in home state growth we’ve seen in recent years.
The Dodd-Frank Act brought about the ability for individual states to begin charging self-procurement taxes to captive insurers who are domiciled outside of where their principal operations reside. This resulted in the captive being charged a domicile premium tax as well as their home state procurement tax.
What’s the impact to captives?
For larger captives, the impact may be minimal. However, for some of the smaller captives, this extra tax could be a significant hit. In some years, the tax may tip the scales on meeting their minimum domicile capital requirements.
In addition to avoiding a more significant tax burden, requirements such as having a resident director, holding an annual meeting within the state of domicile and where you’re allowed to issue policies, are no longer issues that captives have to navigate around. Hiring a resident director and the various expenses involved with holding an annual meeting can add up over time, but are significantly reduced when the home state domicile comes into play.
Which factors should be considered?
Here are some key questions to consider before opting for a home state domicile:
- Does the home state domicile make sense given your principal operations are located there and the vast majority of your exposure risk is located within this state?
- Will self-procurement tax be a significant expense for the captive, and how aggressively would you pursue it?
- Is the direct written portion of your program significant enough to create cost savings with a home state domicile?
- Should the captive be successful, would being an admitted carrier in your home state offer other captive advantages, such as offering primary cover or using the captive as a potential reinsurer without the need to post significant collateral?
What’s the next best step?
While various offshore and select onshore domiciles continue to attract a large number of captive insurers, the increase in new onshore domiciles continue to make the election of an onshore domicile a viable and competitive option for many insurers.
Domicile selection is a critical aspect of the captive formation process. Any prospective captive insurers should work with their advisory team to discuss all possible domiciles that best align with the regulatory, operational and financial needs of their prospective captive.
To learn more about alternative risk solutions, be sure to read this blog to determine if captive insurance is a fit for your organization.