How does a captive's domicile affect what it can invest in?
Insurance is regulated locally, so the rules follow the domicile.
According to Jack Meskunas, Managing Director at Oppenheimer, insurance in the United States is run at state level rather than federally, so there is no single federal capital requirement. Each domicile sets its own rules and applies them with a lighter or heavier hand. He draws particular attention to the distinction between an investment being allowable and being treated as relevant.
Because insurance is regulated at state level, Meskunas says a captive domiciled in one place operates under different rules and a different regulator than one domiciled elsewhere. He names Vermont, Connecticut, North Carolina and Bermuda among the larger domiciles by way of illustration.
The practical consequence is that the same portfolio can be treated differently depending on where the captive sits.
Key takeaways
Insurance is regulated at state level, so capital and investment rules follow the domicile.
An investment can be allowable while receiving no regulatory credit as a relevant asset.
Regulatory styles differ, but the shared concern is that the insurer survives to pay claims.
The distinction he keeps returning to is allowable versus relevant. Using Bermuda and Bitcoin as his example, he describes a regulator permitting the holding while giving no credit for it, so the asset counts as though it were not there.
He contrasts regulatory styles rather than ranking them. In his account some domiciles ask to see the investment plan and asset allocation model and may push back on an equity weighting they consider too high, while others want to know the plan makes sense without dictating allocation. What every regulator wants, he says, is confidence the insurer will still be there to pay claims.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“you are allowed to do it, but it is not considered a relevant asset”
Transcript
Read the full transcript 34 turns
speaking of, could you walk us through what regulators look for in captive
investment programs? And what are the buzz words or the vocabulary that they use? So, we went over
some, which is a regulatory capital, surplus, claims reserves. Run us through what, your
day-to-day looks like when you're talking to regulators and some of the buzz words or the words
that they use. Sure. Well, the interesting thing about captives is, insurance is run on a state
level. It's not a federal, it isn't a federal thing. So, there aren't, there aren't federal
requirements for, capital. So, if you're a captive is domiciled in Vermont,
it has slightly different rule, they have a different regulator and different rules,
then, captives that are in Connecticut or in North Carolina or Bermuda that came in
Ireland, some of the big, captive domiciles. So, and one of the things that,
they look at is the difference between allowable investments and relevant investments.
And particularly, for instance, in Bermuda, they'll look at something and they'll say,
okay, we will allow you to put this in your captive. For instance, Bitcoin. You,
are allowed to do it, but it is not considered a relevant asset. In other words,
you can put money on Bitcoin, but we don't give you any credit for it. So, it's as if,
it's as if that money doesn't exist. It could have been, it might as well have been in your
company's onshore balance sheet. Or, you're not getting any credit. Right. You know, or, and so,
there's, so each, domicile has their own rules and either a light or a heavy touch
on what it is that you're allowed. For instance, if they came in islands,
you have to show them the investment plan, show them your asset allocation model,
and then they tell you whether that's okay. And they might say, whoa, you want to be 20%
equities. We think that that's too much. You can be 15%. And so, they, have a
relatively heavy hand. Other states are, they have a lighter touch Bermuda, in the case of Bermuda,
which obviously another offshore domicile. They want, they want to know that your plan makes sense,
but they're not really going to tell you what your asset allocation has to be. They want to
make sure that you have enough money that it survives as an ongoing business. And that's
ultimately what you want, because you want that insurance company to be there when you need to
pay claims. Of course. So, which, and this is why domicile selection is extremely important
in a captive, because different domiciles work better for certain kinds of captives.
And, you'll see it. This is why there's so many health care captives in the Cayman Islands.
This is why there's so many automotive industry captives in Turks and Caicos, because of the way
they regulate it. This is why you see North Carolina and Vermont growing leaps and bounds
with all kinds of other captives, because they have very good regulatory frameworks
to work within
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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