Choice of Jurisdiction

Early in the process, the client must make an important decision: domicile for the captive.  The client should consider the economic and political stability of the jurisdiction, tax and regulatory environment, local employment issues and the quality and quantity of captive consultants and services providers, such as formation consultants, insurance managers, auditors, legal counsel, financial advisors, actuaries, and pooling managers, to name but a few.  Cost, administrative flexibility and geographic proximity are also relevant.  A domicile must have the regulatory and business infrastructure to support the effective operation of an insurance company.

 

Six Essential Elements of a Captive Domicile *

  1. Captive Law that is up-to-date and well crafted
  2. Regulator that is firm, but flexible
  3. Service Providers who are knowledgeable and experienced
  4. Owners who are engaged and satisfied
  5. Association that is active and vocal
  6. Legislature and Administration that is informed and supportive

* Source: Russell Coy II, Captive Coordinator, Kentucky Department of Insurance, Financial Standards & Examination Division

Worldwide Marketplace

The captive insurance marketplace is worldwide.  Several states have modern captive insurance statues, including (ordered A-Z) Arizona, Delaware, District of Columbia, Hawaii, Kentucky, Montana, Nevada and Utah.  The number of states enabling captive insurance continues to grow in response to recent IRS "safe harbor" rulings. 

 

However, there are regulatory and financial requirements for domestic captives that do not exist in certain foreign domiciles.  For example, a licensed captive may be subject to compliance with rules and regulations of the National Association of Insurance Commissioners ("NAIC").  The NAIC has complex regulations with respect to the amount of minimum capital ("risk-based capital"), and the basis for calculating reserves for future liabilities ("statutory accounting").  These regulations do not, however, apply to IRC Section 831(b) small captive insurance companies, and therefore should not be a determining factor when making the domicile decision for a small captive.


Captive incorporations offshore have also continued to grow for both public and private companies in places such as Bermuda, The British Virgin Islands and the Cayman Islands, where initial capitalization requirements and incorporation expenses are often lower and the insurance regulators support creative structuring of captives.  In light of President Obama's recent declaration against US companies  domiciled offshore, the use of such domicile is not recommended at this time for small captives, regardless of the Code 953(d) election to be treated as a domestic corporation for US federal income tax purposes.