Originally Published January 2013 http://www.ifcreview.com/restr...
The business case for the establishment of a captive insurance company by a business owner, when done properly, is a thorough and appropriately detailed evaluation process. As is the case with most business opportunities - an assessment of the facts and circumstances are made; various options are explored; scenarios are contemplated; costs and benefits are calculated; and a final plan of action is determined. Like all business plans and strategies, the devil ‘so to speak’ is not so much in the details as it is in the implementation.
When discussing the concept of captive insurance, most times a convincing argument can be put forth to proceed with the formation of a captive insurance company, provided the candidate is the owner of a successful business. The difficult part comes thereafter when the business owner asks: “OK, how do we proceed?”
It is at this moment when one hopes the business owner has engaged the services of a team of professional advisors as opposed to ‘buying something’ from a commissioned agent. The business owner is about to give creation to an entity that is initially contemplated as a risk management tool. Of additional significant importance is the matter that if the captive insurance company is properly organised and deployed it can have significant positive impact on his or her wealth management strategies as well as estate planning and asset disposition strategies.
While these latter aspects are very important considerations, the primary focus of this discussion is one of the first critical decisions, or choices, the owner of a captive insurance company must make: where should this entity be domiciled?
In the common vernacular, ‘captive insurance’ has most often come to mean those entities fitting within IRC §831(b) of the US Tax Code. While these entities should be designed from the perspective of an alternative risk management strategy, they also are structured in a manner so as to utilise the exemption from current income taxation of the first US$1,200,000 of premium income the captive receives. Captive insurance companies can also be of great size. It has been reported 90 per cent of the companies in the Fortune 1000 operate captives with premiums which are much in excess of the exemption amount.
Back to the question: ‘where to domicile the captive insurance company?’ As one might expect, there are an abundant number of choices. At last count there are 30 US states and territories that have established jurisdictional authorisation for captive insurance to be domiciled within their state or territory. Also, there are 35 internationally sovereign jurisdictions seeking the formation and basing of these entities within their borders.
So where to choose? Within the United States one of the more active and larger jurisdictions is my home state of South Carolina. Yet, we recommend the Commonwealth of The Bahamas to captive insurance clients as a preferred site of domicile. Like most business decisions, there are a multitude of factors that come into consideration when narrowing down a list of options to a single choice over all others. Very rarely is there a single overriding aspect that has the effect of a ‘veto’ over all other considerations. And, that is the case with choosing a location of domicile for a captive insurance company. What follows are some of the aspects concerning a Bahamian jurisdictional domicile of benefit to the business owner:
Capitalisation Requirements: Many, if not most jurisdictions, have minimum capitalisation requirements that must be met. Some are expressed in absolute amounts; some as a percentage of premium dollars written; and some as a combination of both. This is a matter to be researched carefully since very few are alike and there is no prevailing ‘norm’. We find the Insurance Commission of the Bahamas’ (ICB) requirements reasonable and very workable.
Premium Tax: Many of the US state jurisdictions impose a premium tax. This tax can be at a rate that ranges from one per cent - two per cent and is applied to all premiums written and received. For captives with significant premium levels, this can quickly become a substantial expense.
Investment Portfolio Options: As a captive becomes seasoned and has several years of operations behind it, a significant investment portfolio will accumulate. Depending on the investment desires and strategies of the captive owner, some jurisdictions will have investment guidelines that may seem restrictive. While the Bahamas does have requirements and standards, they are well reasoned. And, if circumstances arise that a variance is desired, there is the ability to submit a request for such consideration.
Consistency of Regulatory Environment: The ICB has been active with the captive insurance industry for more than 60 years. Because of this long history the ICB has developed a regulatory environment that is understandable, well thought out and predictably applied.
Efficiency of Regulatory Environment: With the renewed emphasis on captives by The ICB, they are attuned to the needs and requirements of this specialised industry segment. This has been a key attribute. While many jurisdictions claim to be ‘industry friendly’, the ICB has demonstrated to be so. Without this regulatory familiarity and background, some jurisdictions can be more of a challenge to navigate.
Regulatory Accessibility: If there is one aspect of working with the Bahamian jurisdiction, the accessibility of persons, Boards and Commissions cannot be stressed enough. Not a month has gone by this year that we have not initiated dialogue with personnel of the ICB. We have always been able to reach the person we need. Of a great importance also, is the ability to arrange in-person meetings whenever situations warrant such. It is not a matter of trying to get on an agenda or schedule. Going beyond accessibility, on many occasions, the regulatory function will reach out to the business community asking how they may be of further assistance.
Financial Industry Infrastructure: The Bahamas Financial Service Board (BFSB) has done an excellent job of creating an environment that encourages financial institutions and service providers to operate in the Bahamas. This has caused the Bahamas to have a global footprint in the world of insurance and corporate finance.
"The ready availability and supply of financial institutions, accountants, auditors, legal advisors, and service providers allows one to conduct the majority of its business and transactions in a locally based manner. For example, there are currently more than 250 banks and trust companies licensed by The Central Bank of The Bahamas."
Our initial experience with the Bahamian business climate dates back to more than four years ago when it began advising clients in the formation of captive insurance companies. At that time, most of the local contact was handled through other intermediaries. Over time and as our business volume increased, we chose to handle our affairs locally. What could have been a daunting and intimidating experience was no such thing. Once the local business community understands that one is here conducting business, as opposed to a casual visitor, the welcoming and eagerness of all to help is impressive. Whether it is hoteliers, bankers, accountants or taxi drivers – all appreciate that business growth is what will ultimately drive the islands economy and the citizenry’s prosperity. I have also travelled here as a tourist and been treated equally well.
This past year, we took on a whole new commitment to the Bahamian economy and business climate. We were instrumental in assisting in the formation of several different entities that will be service providers to the captive insurance industry. All of which will be based in the Bahamas. This activity has resulted in the investment of significant capital dollars in local institutions. Going forward, we expect to have even greater activity in terms of premium dollars flowing through Bahamian licensed captives. Further into the future there is the possibility of locally based employment and real estate investment.
There is a saying that business goes where business is welcomed. That is my experience both as a business owner and an individual consumer. As a business owner and a business professional, I feel very welcomed by the people of the Bahamas. I am glad and proud to be part of what has been referred to as the resurgence of the captive insurance industry in the Bahamas. In a presentation before the joint Insurance Commission – BFSB industry briefing in Nassau on June 26, 2013 I stated that the captive insurance industry in the Bahamas is poised to approach Vermont, long regarded as “the gold standard” of captives, as relates to captives for small to medium sized businesses.
About the Author:
Peter J Strauss is an internationally recognised authority in the area of captive insurance companies, specifically those that are referred to as § 831(b) “captives” and § 806 “small life companies”. He has spoken before the American Institute of Certified Public Accountants, The Hawaii Tax Institute, and the Physician Hospitals of American among other groups regarding captive insurance.
Mr Strauss is the managing member of The Strauss Law Firm, LLC based in Hilton Head Island, SC. He is a graduate of the New England School of Law and holds a Masters of Law in Estate Planning from the University of Miami.