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Hugh's Views Issue 8: July 7, 2003
Hugh's Views on Offshore Domiciles

One of captive.com's visitors sent in the following query about offshore captive domiciles. He was apparently put off by the promoters who have large offices in the major domiciles, and therefore have vested interests in steering potential captive owners towards Bermuda, Cayman, or one of the other larger domiciles. Our visitor sent the question to Hugh R. who told us that this kind of question arises more often than you might think.

Here was the initial inquiry, suitably neutralized as to source and origin:

"I serve as the Exec. V.P. and General Counsel of a mid-sized transportation company. We are in the process of evaluating captive options for our company. Most of the players we are dealing with (AON, Marsh, etc.) have their own particular domicile that they seem to push. We would like to know about Puerto Rico, St. Maarten and even St. Barts if it has captive opportunities. I would like a list of all domiciles available."

Reply: Dan, the truth is that you can domicile a captive insurance company anywhere you want - from Fiji to Montserrat (if it's still there after the volcanic eruption!). One big difference between domiciles is in the presence or absence of local captive management expertise. Where that is found, they are generally considered to be "regulated" domiciles, and are generally in good graces with the US and international observers. Where there is no local captive management expertise, the captive is in the hands of a garden-variety company representative who files copies of whatever you send him. In the old days they called this a “letterbox domicile,” with obvious pejorative connotations.

In the unregulated domiciles without local expertise the actual "management" is done somewhere else, normally onshore US. Many credit life captives were domiciled in Turks & Caicos, for instance, and run from onshore US. The reputation of the domicile, if of no consequence to your board and shareholders, can therefore be anywhere as long as you are managing it from Peoria.

And there are actually some regulated domiciles with only nominal local expertise. USVI is one (offshore for US tax purposes!), and Mauritius is another.

If I were you I would first decide whether offshore really has advantages over onshore. If it does, then decide who is going to "manage" the captive, external professionals or in-house accountants and insurance people. If in-house, then you may pick from a plethora of non-regulated places, with an eye towards ease of access and acceptability to your board. For a full list of every one of them, you have only to look up, as an example, Mexico’s list of places in which Mexicans are not supposed to capitalize subsidiaries – it is half a page long.

There are, in the regulated domiciles, independent managers (an independent manager is one that is not owned by Marsh, Aon, Willis, AIG, etc, but owned and operated by the active accountants), These may offer lower cost service than the big ones, but not always. And of course they will have their own reasons for promoting the one domicile they happen to be in.

Hugh’s view: The sensitivity of fronting companies and reinsurers is more important these days than the “opportunities” for financial and fiscal advantage you may seek in unregulated domiciles. If either of these (fronting or reinsurance) is of importance to your captive project, then you had better stick to those domiciles the insurers and reinsurers recognize – unless you have some kind of influence with them to get them to accept an unregulated domicile.

Of course, you will have to make a visit to the selected domiciles, most of which are in Caribbean, Mediterranean or even Pacific warm-water ports. That could take you all winter, be deemed a legitimate business expense, and give you good first-hand knowledge of why unregulated domiciles are not for you.

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Hugh Rosenbaum, one of captive.com's friends and valued contributors, is a freelance consultant. Hugh can be reached by telephone at +4420 8883 6729 or by e-mail at hughro2@yahoo.com. Learn how you can spend a day with Hugh!

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