Home State Advantages May Lead to Captive Re-domiciling

NU Online News Service, March 8, 1:46 p.m. EST

The U.S. captive industry may be undergoing some changes with a new trend towards domiciling in a company’s resident state, according to a captive expert.

“It’s absolutely irrelevant what’s up and coming, it’s more about what’s your home state,” says Gary Osborne, president of Vermont-based USA Risk Group, a captive management company.

He tells NU Online News Service that right now he has two and possibly three captives being formed in Missouri that are re-domestications from other domiciles.

While it’s been widely noted that the Nonadmitted and Reinsurance Reform Act (NRRA), part of the Dodd Frank ruling won’t apply to captives, “it has gotten people paying attention to self-procurement taxes again,” he says. A self-procurement tax is a state-imposed premium tax of up to 4 percent on premiums paid to most captives.

Osborne adds, “It’s a huge movement, and it’s going to be a problem for the Vermonts, South Carolinas and Hawaiis of the world.”

Because of the economic downturn as well, he says, forming a captive in a company’s home state is now seen as an advantage.

An independent white paper released in the fall, however, concludes that the law has no applicability to captive insurance. The white paper was commissioned by the Vermont Captive Insurance Association (VCIA) and prepared by the law firm of McIntyre and Lemon, PLLC, Washington, D.C.

Dave Provost, deputy commissioner of captive insurance in Vermont tells NU in October, “If you had, or did not have a surplus lines or self-procurement tax issue before Dodd Frank, it didn’t change anything. It didn’t change the state’s laws on the taxation of captive premiums.”

Some of the misunderstanding, he explains, is that people were “panicking that they needed to move their captive to their business’ home state to avoid self-procurement tax. But if it didn’t apply before, it doesn’t apply now.”

Osborne observes that if a company forms a captive in its domiciled state, any questions about “who will be the directors, where and when can you have meetings, where can you issue policies, all those issues disappear—and you’ve also addressed [the issue of] self-procurement taxes.” Osborne says.

So far about 36 states have captive laws on the books. Florida is on the verge of becoming a captive domicile and Oregon is on its way, he adds, pointing out the number of states that are passing captive regulations.

Companies in states that don’t have captive statutes, such as California, will form their captives in states that do and will “take every step they can, not have to deal with procurement taxes,” Osborne says.

He notes, “There’s not an up-and-coming domicile as much as there is a trend, for many reasons, to domicile in your home state.”

New York, he adds, was ahead of the curve in that all its captives are now New York-based companies. In fact, the one New Jersey-based captive has relocated to New Jersey, he says.

Domiciles now being formed are recognizing the trend and creating captive regulations making it more advantageous for organizations to form captives in their home state.

Osborne notes that a number of captives under his company’s management are now re-domiciling. “I’m now thinking it would be 19 or 20 states,” he says, adding, “If you ask me where I am going to be putting business, I don’t know. It’s going to be driven heavily by whether it makes sense to do business in their home state, before going somewhere else.”

Not only will states be making themselves available for captive formations, they also will be actively recruiting captives, he says. “At the moment it’s friendly, but it could get unfriendly.”

For example, Missouri could argue that a company headquartered in Missouri operating in California, “Under Missouri’s interpretation of the Surplus Lines act, could argue that you owe them the tax on everything, because that’s your home state.”

Even though this hasn’t yet been tested, he says, some companies are going the route of domiciling in their home state to be safe.

“In some ways it’s an easy choice to make,” he says. “Pay Missouri the captive premium tax and take that potential off the table.”

While in the past a big consideration for those forming captives was domiciling in a state with solid infrastructure, Osborne says that those states adopting legislation are doing a good job of building a solid program and bringing in staff with an understanding of captives.

Will the many captive companies located in Vermont—one of the world’s largest captive domiciles—leave?

Osborne doesn’t believe there will be a mass exodus. “This is a big deal if you’re a $10 million captive or more,” he says. “If you’re a $1 million, $2 million or $3 million captive it’s not going to be a huge difference.”

For the larger captives, however, “If the state did decide to come after you for procurement tax, you could be looking at $200,000-$500,000” he explains. “So if you’re forming a new one, why not take that off the table?”

Page 2 of 2

Resource Center

View All »

Contractors General Liability Coverage 102

What is a prior work exclusion? Which option is right for my client? Why do...

Sign up today to get a 50% matching credit -...

Insurance marketing sometimes seems like it's a game of swings and misses, but we're here...

Guide: 5 Steps to Selling Cyber

Cyber risk and data security is on the agenda of every business owner and executive....

Citation Correlation

Do rigger and signalperson qualifications correlate with the cause of crane and rigging accidents? ...

Complete Guide to Electronic Signatures in Property & Casualty Insurance...

In property and casualty insurance, closing new business quickly is key. Learn how to leverage...

INSTANT ACCESS: Complimentary Sales Closer Questionnaires

Help property owners or managers compare your commercial residential property insurance coverage vs. the competition....

Determining Vacant Property Perils and Valuations

Are your clients fully covered for Vacant Properties? In this economic climate, your insureds may...

Risk Management for Law Firms

This package of 3 concise risk management articles offers straightforward content and practical suggestions law...

Guide: Top 15 E&O Risks-And How To Avoid Them

Accidents happen. But when it's an errors and omissions oversight, that accident can open your...

We'll Show You How to Reach Your Sales Goals

Whether you work alone or have a team of agents working for you, we can...

Risk Management Report eNewsletter

Identify problems involving emerging risks, reinsurance, and business interruption with help from Risk Management Report - FREE. Sign Up Now!

Advertisement. Closing in 15 seconds.