The most important decisions for a captive owner are 1) choosing your captive's manager and 2) choosing your captive domicile (i.e. where it will be formed, licensed, and operate).  The choice of domicile will determine the restrictions or freedoms your captive will have, how receptive and responsive captive regulators are to your captive's business plans, and the level of regulatory and administrative costs your captive will incur.

Your choice of captive domicile may also be influenced by captive advisors.  When seeking advice from captive consultants and insurance brokers / agents about forming a captive, you'll want to know if their domicile recommendations are influenced by the presence of affiliated entities in the very domiciles they are recommending to determine if they can give you an unbiased opinion.

To make the best informed decision about your captive's domicile, there's nothing better than interviewing key individuals within the captive regulatory agency in the state(s) that interest you, as well as interviewing potential captive management firms.

Examples showing how Montana attracts captive insurers to the state can be found below.

Each captive insurance domicile, whether a US state or foreign jurisdiction, has its own laws governing captive insurance companies.  Captive insurance laws typically define:

• The types of insurance coverage that can be written;
• The corporate structures allowable, shareholder/member criteria, and minimum capital requirements (e.g. $1250,000 to $250,000 for a pure captive);
• The licensing requirements for different captive types (e.g. pure, industrial insured, association, sponsored) and the criteria for participating insureds;
• The regulatory costs that will be imposed on captives (i.e. license fees, taxes, and regulatory compliance costs); and
• The regulatory agency that is responsible for licensing.

In addition, captives are also be subject to the general corporate laws of the state or jurisdiction in which it is licensed.

There are few effective differences among the captive laws of the few US states that have such laws.  The major difference among these states is the captive regulator's responsiveness, captive knowledge, and flexibility.  For example, a captive licensing application in Montana typically is approved within 20 to 45 days, while other states' captive regulators have taken as much as 6 months to approve a simple captive application.

Montana's captive insurance law is included on this site.

With very few exceptions, captives owned by US concerns are generally better off domiciling their captive within the US than in offshore domiciles in our opinion.

The IRS has closed tax loopholes that previously existed for offshore insurance transactions so that premiums paid to offshore insurers are subject to 4% federal excise tax (1% for reinsurance transactions) and offshore earnings in the captive are treated as Subpart F income for US shareholders (regardless of whether such profits were distributed).  Further, the captive can become subject to additional branch profits tax unless the off-shore captive elects to be taxed as a US company.  So tax should not be a key reason to domicile your captive offshore if you're a US taxpayor unless your captive will be insuring risks in foreign countries.

Offshore captive insurance transactions will likely be subject to greater scrutiny by the IRS and the FBI due to concerns over money laundering, tax evasion, and shams intending to hide assets from creditors.  Som, but not all, offshore captive domiciles have agreed to share information with US enforcement agencies to help root out abuses.

If you want the option of writing ERISA employee benefits in your captive, domicile it onshore.  This is because of an onshore domicile requirement by the US Department of Labor.

While offshore domiciles often have lower capital requirements for captives, undercapitalization increases the risk that your captive will not be considered a bona fide insurance company for IRS purposes, thereby endangering tax advantages and subjecting captive profits to double taxation.  Undercapitalization also increases your captive's risk of insolvency.

Some sources cite the benefit of captives domiciling in Bermuda to access the significant reinsurance market there.  But even those reinsurers may not be willing to provide reinsurance for many of the unique exposures that captives insure.  Reinsurance brokers are able to access worldwide reinsurance markets for captives domiciled anywhere, including the US.

Service providers in offshore domiciles typically charge higher fees than onshore providers.  Their office hours may not coincide well with yours, an important consideration when you need a certificate of insurance quickly.

Hurricanes are a major risk for a number of offshore captive domiciles (and some onshore domiciles such as South Carolina).  In 2004, the Cayman Islands were hit hard and captive managers struggled to provide services to their clients in the months following.

So with the higher risks and higher cost of offshore domiciles, coupled with US captive domiciles such as Montana that are business friendly and have flexible laws, the majority of US concerns will be better off domiciling their captive in the US.

In a nutshell, it's Montana's friendly and responsive captive regulators, lower captive costs, lack of bureaucratic red-tape, and closer proximity to companies west of the Mississippi that make it a great place to domicile a captive.  Here are some actual examples to demonstrate:

• Montana's low regulatory fees are only $200 for an initial application and $300 for annual captive licensing fees.  Compare this to the $8,000 annual fees charged to captives formed in the Cayman Islands and  $5,500 annual licensing fees charged by Arizona.
  
  
• Montana's special captive legislation reduces capital investment and avoids guarantee fund assessments compared to forming an insurance company in other states.  For example, the minimum capital and surplus required in Montana is $125,000 to 250,000 for a pure captive, compared to $15 million in Washington State, $2.6 million in California, $2 million in Texas, and $1.6 million in Missouri.
  
  
• Four captives redomesticated to Montana because they found Arizona's captive regulators to be overly cautious, slow to respond, and unwilling to allow these captives to reinsure their risks through captive reinsurance pools.  These companies now enjoy Montana's responsiveness and greater access to reinsurance.
  
  
• The State of Montana has a dedicated staff assembled by the Insurance Commissioner to work exclusively on captive insurance licensing.  Captive applications are reviewed immediately by staff who notify the applicant within 48 hours whether additional information is needed.  Montana's captive regulators have an internal goal of issuing decisions no later than 45 days after submission, and strive to expedite simple applications within 20 days or as reasonably possible.  ORG's captive clients have enjoyed obtaining their Montana captive insurance license within 25 calendar days (on average) from the time the application is submitted for approval. 
  
  
• When Montana's Chief Insurance Examiner retired in December 2004, Montana's Insurance Commissioner saw it as an opportunity to attract more captives to Montana by hiring someone with captive insurance experience for the job.  He hired Steve Matthews from South Carolina, who has extensive experience with captive insurance programs and who also has a "can-do" common sense approach to captive licensing and on-going regulation.
  
  
• In anticipation of Montana's legislature convening in 2007, Montana captive insurance regulators approached captive owners and captive managers to recommend improvements to Montana's captive insurance law (Title 33, Chapter 28).  The Montana Insurance Commissioner's Office supported these recommendations throughout the entire legislative process and the captive-friendly improvements were signed into law in May 2007.
  
  
• Montana's captive regulators adopted administrative rules allowing greater flexibility in regulatory reporting for captives.  They also streamlined the annual report for pure captive insurance companies (with input from ORG), helping to keep regulatory compliance costs lower for captives.
  
  
• Montana based captives that write less than $1,250,000 in annual premium only pay $5,000 in Montana premium taxes.  Captives that write greater premiums will only pay a 0.4% tax on direct written premiums or .01% on reinsurance premiums (i.e. premiums assumed under fronted programs) but in no event will Montana premium taxes be greater than $100,000 in any one year.  Captives are not subject to Montana corporate income tax.

Next:  Tax Considerations