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Vermont rises to world’s top captive domicile

Posted On: Apr. 1, 2024 12:00 AM CST


The number of U.S. captive domiciles has more than doubled over the past 25 years and the number of captives they house has multiplied several times over, but it was only last year that a domestic domicile became the world’s largest.

Vermont, which in 1981 was among the first states to pass captive legislation, last year overtook long-time leader Bermuda and the Cayman Islands, to become the world’s largest captive domicile with 659 captives (see chart).

The Green Mountain State has long led the ranks of domestic captive domiciles and other states have looked to it as an example of a successful domicile. Last summer, when Bermuda released its 2022 captive numbers, it became clear that the domicile had slipped behind Vermont and Cayman, and for 2023 Vermont moved ahead of both its offshore rivals. Bermuda has not yet disclosed its captive total for 2023, but it is not expected to report a significant increase.

Most of the growth in captives last year was in the United States, said Nancy Gray, regional managing director-Americas at Aon PLC in Burlington, Vermont.

“There’s no financial benefit in terms of going offshore as opposed to onshore and it’s much easier to sell it internally when you are forming a captive in the U.S.,” she said.

In addition, onshore domiciles have expanded the risks they allow captives to cover, said Michael O’Malley, managing director at Concord, Massachusetts-based Strategic Risk Solutions Inc.

“The onshore domiciles have become more comfortable with entrepreneurial-type risk,” Mr. O’Malley said.

Also, many U.S. captive owners elect to be taxed as a U.S. entity, and offshore captives require more administrative filings, he said. 

Other factors affecting offshore domiciles include changes in business practices since the COVID-19 pandemic, captive managers said.

“People themselves are just working longer, and to give away two or three days of their time to go to a board meeting is challenging,” said Barry White, Annapolis, Maryland-based executive vice president, sales advisory and analytics, at Artex Risk Solutions Inc., the captive management unit of Arthur J. Gallagher & Co. 

Still, Bermuda and Cayman continue to attract interest due to the skillsets available in the domiciles, he said.

Marsh saw growth in Bermuda last year but more of the formations were entities for commercial insurance companies rather than single parent captives, said Ellen Charnley, president of Marsh Captive Solutions in Las Vegas. “The domicile has pivoted toward that area for some time,” she said.

Marsh also formed several captives in Alberta, which approved captive legislation in 2022. Alberta is home to many large companies that see benefits in choosing their home province to establish a captive, Ms. Charnley said.

Several domiciles also saw significant increases in captive cells last year. Tennessee, which has 522 individual cells, said the smaller structures are attractive ways for companies to start using alternative risk financing structures.

“Increasingly, these smaller lines of insurance are becoming an extremely popular vehicle for companies looking to reduce portions of their insurance expenditures,” a spokesman for the Tennessee Department of Commerce and Insurance said in an email.

While most domestic domiciles reported growth last year, Nevada and Delaware reported drops.

The IRS’s continued investigation of 831(b) captives, and its run of successful court wins against 831(b) owners it alleges were not using the captives for insurance has led some owners to shut down microcaptives. The IRS has also proposed new regulations regarding 831(b) captives.

More than 50 captives closed in Nevada last year.

“The captives’ closings were being done as a proactive reaction to the IRS proposed regulation regarding 831(b) captives,” Nick J. Stosic, deputy commissioner in the state’s department of insurance, said in an email. 

Delaware did not respond to a request for comment.