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 in international domiciles, tax and regulatory environment and the quality and quantity of knowledgeable service providers such as insurance managers, auditors and legal counsel. Geographical proximity, time zone considerations and languages spoken in the jurisdiction, if internationally domiciled, 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 over twenty states that have insurance statutes for captive companies. These states include, but are not limited to, Utah, Nevada, Arizona, Colorado, Vermont, Kentucky, South Carolina, Delaware, District of Columbia, and Hawaii. While captive incorporations occur in these and other states, there are regulatory, operational and financial considerations with both benefits and requirements that do not exist in many of the foreign domiciles.
The bulk of the growth in captive incorporations has historically occurred in international jurisdictions. Such growth is attributable to a number of factors. The initial capitalization requirements have been generally less, the company incorporation fees and time requirements have been also generally less, and the insurance regulators in many offshore locations, have been the first to understand and support the growth of captive utilization and the innovative insurance solutions that can be provided by a properly constituted captive company. Each international domicile has different formation and operation criteria, but the Caribbean in particular has grown dramatically in the number of domiciles that approve captive companies and welcome them from a business perspective. The largest venue for captives is Bermuda. Other venues with substantial numbers in the Caribbean include the Cayman Islands, the British Virgin Islands, and Barbados.
Alta brings a sophisticated appreciation of the international captive and an unrivaled technical competence in implementing a suitable international vehicle to achieve the specialized insurance needs of the client. Its capability as a specialized insurance boutique provides a nimbleness for the mid-market that is lost in large financial intermediaries offering alternative risk arrangements. Alta does not utilize the international arena to capture business but inverts the concept of captive to give the client the freedom and mobility of choice while solidly anchoring the entity to its U.S. source insurance commitment.
Having experience in numerous international, Alta recommends the British Virgin Islands ("BVI"). This jurisdiction tends toward the most pragmatic in terms of internal regulation and cross border transactions of the primary Caribbean locations. The regulations do not require captive board meetings to be held on the island. They allow funds to be deposited in U.S. depository institutions, and they also allow U.S. attorneys, accountants and actuaries to qualify in the jurisdiction without the requirement of employing a matching domicile company. The BVI Insurance Act combines the best of a long international insurance tradition embodied in various British Commonwealth acts and have a progressive set of regulations combined with a knowledgeable bureaucracy. In appropriate situations where an international domicile is indicated, Alta can provide the sophisticated expertise to implement an insurance strategy that complements both international and U.S. regulatory environments.
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.
However, in recent years the due diligence requirements for the creation of a captive and annual operational reporting in responsible jurisdictions require virtually the same financial disclosures that would be found in a domestic domicile filing. This has led to the emergence and accelerating growth of the domestic captive.
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") which has both drawbacks and benefits.
The NAIC has a series of regulations with respect to the amount of minimum capital ("risk-based capital"), and the basis for calculating reserves for future liabilities ("statutory accounting"). Since each state insurance department and the NAIC is primarily concerned with the solvency (as opposed to earnings) of their domiciled insurance and reinsurance companies, rules for capital requirements and statutory reserve requirements are rigorous, 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) require continual attention as well. The licensing process can be more involved, and can require significant personal information from shareholders, directors and officers.
While there are certain local requirements, many states do allow for more pragmatic captive management. In an era of closer regulatory scrutiny the domestic domicile has become advantageous in part because of the very regulatory supervision that once appeared onerous. The supervisory regime has provided increased viability and acceptance to the captive environment and the large number of states with captive legislation is testimony to that fact. While international formation still has its part to play, especially in the worldwide arena for specialized reinsurance, the domestic domicile has increasingly become the formation vehicle of choice.
Of the domestic domiciles Arizona, Utah, Nevada and Vermont are considered attractive business environments for captive insurance companies. Having considered the timescale involved in establishing a captive insurance company, the initial premium volumes, operational concerns and the pragmatism of doing business, Alta concentrates its attention on these domestic domiciles in general and Utah in particular.