Is your captive domicile still the right option for you?

Published on Mon, 01/08/2022 - 12:40

By Alexandra Gedge, Senior Captive Consultant, Global Captive Solutions, Hylant

Redomiciliation is a process of continuance in a new location and discontinuance in the original domicile. Redomiciliation means that the captive does not need to be shut down in moving the legal entity, as long as both locations support redomiciliation. 

Captives have long been a valuable strategic tool for risk managers, but with the current harsh market conditions and with changing external factors, captive insurance companies are more in focus. One area of note is captive domicile.

Given the external pressures on captives through the business climate in multiple industries, the global economy and the insurance market, many companies are reconsidering whether the key factors in choosing where to initially operate their captive are still appropriate, or whether these external factors may mean that the captive owner should evaluate other options.

Furthermore, the options of available captive domiciles are changing. In the USA, more states are adopting legislation to allow captives and, in Europe, more countries are also considering captive legislation. This may create a better domicile option for a business than was available when setting up the captive.

It is possible to redomicile a captive. Whilst it may seem like more work to undertake in the short term, redomiciling a captive can provide substantial benefits to the company.

Changing markets

With hardening insurance rates and more difficult terms on insurance policies, captives are in the limelight. Captives are also responding to external factors such as the economic landscape, environmental factors and the pandemic. 

Given these changes, many captives are going through the process of completing strategic reviews, and one key area is captive domicile. This is because, fundamentally, the risks taken on by businesses may be changing, and the decisions made when setting up the captive might have been taken with different factors considered.

There are a lot of factors that go into changing captive domicile.

Common reasons for captive domicile changes

Some of the key factors for captive domicile changes are as follows:

  • Costs: The cost of running a captive is a critical factor in ultimately where a captive is located. Whilst it may not be a driving factor, it is one to consider and if there is a benefit to redomiciling then it may make sense to take the initial lower cost of redomiciliation.
  • Legislation: Where many captive domiciles have significantly enhanced their reporting requirements, some captive owners have explored alternative locations with less onerous regulations. With the introduction of Solvency II, BEPS and IFRS 17 requirements for many captives since originally being set up, there has come enhanced solvency and reporting requirements. It may be that, after these changes, there are more suitable locations for these captives.
  • New domiciles: There have been businesses, particularly in Europe, which have redomiciled their captive back to their parent country. Where regulations have come in (for example in France, Italy and the UK, where all have been reviewing potential captive regimes), the opportunity has arisen for captive owners to manage their captive from the same country or from a country where there are already operations for the business. This can provide benefits for attendance at board meetings, as well as time spent travelling and delays in contacting domiciles given time differences. Where these locations may not have been an option when the captive was initially set up, the opportunity may make sense for some owners.
  • Reputation: It is important that the captive is in a jurisdiction in which the business is comfortable having a subsidiary, thus due consideration needs to be given to the perception of these locations. Captive domiciles have robust legislation, regulators and experts on hand to support with this, but it is important that businesses are comfortable with the domicile.

How to do it

The first stage to redomiciling a captive is to consider the options available to the business and to make a comparison of the various domicile options that make sense, considering the financial, operational and strategic implications.

Upon deciding if a redomiciliation makes sense, the captive board needs to consider the costs in moving, both in time and any frictional costs in setting up a new business. 

Many captive domiciles will allow redomiciliation rather than fully shutting down the captive and setting up elsewhere, including Guernsey, Luxembourg and multiple US states. 

Regulators will require a letter approving the move from the captive, approval from the regulators in both jurisdictions of the validity of the captive and approval to move, as well as evidence of regulatory approval in the new location, financial good standing and due diligence being met before being issued with a certificate of continuance in the new domicile.

This includes any different capital or solvency requirements between the two domiciles, as well as any tax liabilities or capital being released. This can vary in complexity between different locations, and what level of sign-off is required by local regulators. 

It can be a highly valuable process to make the captive more useful, but should be carefully considered before proceeding.