During the past few months, several states have either passed or enacted new captive insurance legislation. Ten years ago, there were only four states (Arizona, Hawaii, South Carolina, and Vermont) that could be counted as onshore domiciles.
During the past few months, several states have either passed or enacted new captive insurance legislation. Ten years ago, there were only four states (Arizona, Hawaii, South Carolina, and Vermont) that could be counted as onshore domiciles. With the recent legislation enactments in Florida, North Carolina, and Texas, the number of states serving as domiciles currently stands at approximately 37.
Domicile establishment has quickly become one of the most competitive segments within the alternative risk industry. Domicile selection has always been one of the most important aspects of captive formation.
So, what do these new domiciles need to do in order to competitively differentiate themselves from others in order to attract captive business? What do captive owners need to evaluate (in addition to the traditional considerations) when choosing an onshore domicile?
Below are a few observations:
First and foremost, the state needs to equip itself with regulators having significant captive expertise—this will help determine its initial qualitative competitiveness as a domicile.
Passing ‘innovative’ legislation is one thing; the next Rubicon to cross is maintaining unwavering consistency in the approval, enforcement, and ongoing management processes. The regulatory staff needs to separate itself, or at least be equivalent with, the other top domiciles in terms of expertise, accessibility, flexibility, consistency, and communication ability.
What will the overarching ‘attitude’ of the captive regulators be as compared to that of other insurance regulators within the state? In a very competitive industry segment, captive regulators will need to exhibit a significant pro-business approach to approval and regulation. How will this approach be perceived and received by the other insurance regulators that may consider themselves as having a more discerning regulatory approach?
Each new domicile will need to formulate a well-constructed marketing and promotion plan. This starts with the development of a sound value proposition. The value proposition is derived from the mission statement and will serve as the ‘operational compass’ for market positioning and conducting business. The value proposition will need to convey the true market differentiators (also known as competitive advantages) of the state in comparison to other domiciles.
How many captives will the state need to legitimise itself as a top domicile? The actual number of captives needs to be quantified in terms of revenue: 100 micro captives will not produce the same revenue as 100 large (more traditional) single-parent or group captives. What is needed to establish and support the necessary infrastructure?
Domicile characteristics: some domiciles (Kentucky and Utah) are perceived as micro captive havens while others (Hawaii and Vermont) have traditionally been viewed as domiciles for larger captives. Captives will have a desire to choose a domicile, favoured by other captives having similar business characteristics, with regulators having familiarity with their industry type, lines of business within the captive, and size of their captive.
If you build it, they won’t always come
Long-term vision and business continuity for the domicile is important. Whether it’s a new formation or a redomiciling of an offshore captive, there is now an overabundance of onshore choices.
As domicile competition increases, it will become more difficult for states to position themselves to attract their desired mix of business.
The biggest hurdles for many new domiciles will be attracting the right regulatory expertise from a relatively small, and possibly diluted, talent pool, developing a solid value proposition and an aggressive marketing plan, and establishing unwavering regulatory continuity and consistency.
