Why Are On-Shore Domiciles Increasingly Attractive?
In the past few years, captive licenses in almost every domestic on-shore location have grown, while many off-shore jurisdictions report declines.
To understand the growth of on-shore captive domiciles, it is important to focus on some of the factors that have recently altered how captive owners approach the process of evaluating locations. These include:
1. The Terrorism Risk Insurance Act – Available only to on-shore captives, this legislation was designed to help the insurance market recover from the effects of September 11 and to provide a practical way to insure terrorism risks. The act set up a shared system of compensation for insured terrorism losses to protect customers and create a transitional period for market stabilization. These benefits alone caused some companies to set up domestic captive insurance companies to insure terrorism risks.
2. Employee benefit liability funding – The creation of a captive insurance company allows certain organizations to lessen their exposure to rapidly rising employee benefits costs. A U.S. branch captive is required for a firm to take advantage of this strategy, since ERISA requirements limit funding to on-shore jurisdictions.
3. State economic growth creation – As a result of the 2008 financial crisis, many U.S. states searched for ways to create in-state economic growth. State legislation to create or revise captive insurance entities began to be enacted on a regular basis. New states without current captive laws sought ways to enter an industry and capitalize on its potential to create jobs and generate business activity.
4. Increased on-shore competition – As the number of on-shore captive domicile alternatives increased, so too did competition. While most U.S. states maintained similar core elements within their captive laws, each made an effort to differentiate itself in some fashion. Common competitive options include reduced premium tax rates, lower minimum capital requirements, authorized lines of business, creative organizational entity structures, and guaranteed timeframes for turning around business requests. Increasingly, companies are finding fewer reasons to look off-shore to find a jurisdiction that fits their needs.
5. Political considerations – For some firms, the political risk of doing business off-shore is simply too great to ignore. The Enron collapse and the negative involvement of its off-shore business vehicles were widely publicized. Statements from the president’s office regarding off-shore tax shelters increased negative public opinion. These factors prompted many owners to give the nod to domestic domiciles -- even without analyzing the financial impact of such a decision.
The decision to choose an off-shore or on-shore location is complex, especially as the business climate continues to be clouded by uncertainty. Business regulation, including laws that govern the insurance industry, is being examined and adjusted across the globe. It is important for captive owners to periodically review whether their current domicile remains their best choice.
Free Download: Offshore to Onshore -- For an informative look at the latest trends in captive insurance domiciles, download “Offshore to Onshore: Re-Domestication of Captive Insurance Programs."
Wilmington Trust neither claims to nor provides legal or tax accounting services. Clients should consult professional tax and legal advisors regarding favorable tax treatment of any particular strategy.