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Weigh pros and cons of changing captive domiciles

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BOCA RATON, Fla. — Changing captive domiciles can have beneficial results, such as avoiding a challenging regulatory environment or saving on premium taxes and fees, but it can also be a difficult path that is ultimately unsuccessful, according to captive owners.

For Atlanta-based The Coca-Cola Co., relocating the Canadian pension risk covered in its Ireland-based captive to a new Bermuda captive was in direct response to Solvency II, the European Union-wide risk-based capital rules for insurance and reinsurance companies that came into force in January 2016, Stacy Apter, director, global risk and investments, told attendees at the 26th annual World Captive Forum in Boca Raton, Florida. 

The Ireland captive was traditionally used to access the European markets, but following Solvency II, it made sense to move that risk to Bermuda, which was deemed Solvency II equivalent last year, and consolidate the company’s international pension risk in the new captive at the end of 2016, she said. 

“Certainly, the Irish regulators were helpful and understanding of the pension risk and were willing to take on the transaction,” Ms. Apter said. “For those of you in Europe, you live and breathe and you’ve got (Solvency II). There’s nothing you can do about it. But for us, we were taking non-EU pension risk. There was no reason to subject ourselves to Solvency II for a location in Canada that is not exposed to Solvency II, nor do we have to be with our captive.”

Bermuda was also a “very accommodating” captive domicile, she said. 

The company also moved its South Carolina-based captive, which covers employee benefits risks in the United States, to its home state in 2015. 

“It just made more sense for us to have a captive domicile in our corporate entity location,” she said. 

But Thomas Nix, director of insurance and risk management for Vail Resorts Management Co. in Broomfield, Colorado, provided a cautionary tale of what can happen when a company tries to redomesticate its captive domicile. 

The luxury travel company founded its captive in Arizona in 2009. It covers exposures such as its ski pass insurance for clients against risks such as injury or pregnancy, reinsurance for its travel insurance product, workers comp deductible buy-down and Terrorism Risk Insurance Act risk. 

Vail considered premium taxes, capital requirements and other key factors when selecting Arizona as its captive domicile, but explored relocating its captive to its home state domicile to save on fronting fees for its ski pass insurance paid to its excess and surplus carrier — a key cost driver, he said. The company met with Colorado regulators and filed an application before deciding to stay in Arizona because Colorado’s pure captive definition does not allow for any unrelated business, Mr. Nix said. 

“Ultimately, Colorado’s just not a good jurisdiction for trying to satisfy the IRS definitions of insurance companies,” he said. “That led to us withdrawing our application. It was a good process, a good idea. It seemed like it could bear fruit and really help us out, but ultimately it was not to be.”

Part of the challenge was that Colorado regulators hadn’t actively pursued captive business in the past and were used to dealing with insurance companies and their specific accounting rules, he said. 

“Ultimately their focus is elsewhere, and that’s OK,” Mr. Nix said.