Onshore or Offshore?

“The fastest way to kill something special is to compare it to something else.”
– Unknown

Say you are purchasing a car. A Subaru Outback and an Aston Martin DB11 are both fine models to choose from, but you are obviously aware that these vehicles are in two entirely different categories.

You wouldn’t expect to see an Outback out on a NASCAR track. Neither would you criticise a DB11 for its lack of off-road capabilities. Subaru and Aston Martin not only have different backgrounds, but also very different standards and purposes for their cars.

Expecting both to perform identically wouldn’t just be unfair – it would be silly. Similarly, comparing offshore captive domiciles with those onshore would be foolhardy.

What’s in a name?

Prior to the early 1980s, offshore was your only option. If you were in the US, you had to look further afield. Domiciles like the Cayman Islands, Bermuda and Barbados were early adopters of captive-oriented legislation, so companies naturally flocked to these locations to set up their insurance entities.  

Vermont’s enactment of captive legislation in 1981 provided the first onshore alternative – a move that has since inspired more than 30 states to follow suit over the last few decades. And what once may have started out as healthy competition between onshore and offshore domiciles can only now be likened to ill-informed bashing.

Offshores are often branded as wildcards – unpatriotic by nature with a fierce appetite for (perceived) secrecy and all things “bad”.

On the other hand, US onshore jurisdictions have been typecast as copycats – late adopters trying to follow a trend that they just don’t understand.

Just as car enthusiasts find the notion of likening an off-road vehicle to a high-performance car ridiculous; so too do captive owners understand how laughable the above stereotypes really are.

So what then, are the facts?

The times they are a-changing

Over the years, onshore and offshore domiciles have worked diligently to level the playing field, finding their own unique niches in the market.

Not all onshore domiciles are considered newbies in this market, as many have matured considerably. Many states have racked up decades of experience, with Vermont leading the way as the third largest domicile in the world.

Meanwhile, offshore domiciles have taken steps to improve their “perceived” reputation through education and correcting “fake news” with verifiable facts and figures. Domiciles like the Cayman Islands have gone above and beyond the call of duty in their transparency and compliance – despite frequent “tax haven” sensationalism in the media.

This continual trend of raising the bar on both sides can only be seen as positively healthy for the industry, and is in no way a hindrance to any one domicile’s success, so long as all are ensuring to provide:  

  • Political stability
  • Robust regulation
  • World-class support services
  • Pools of talent
  • Compliance and transparency
  • Long-term commitment to the industry

Onshore growth

The surge of onshore domiciles has brought learning and change across the board. Experienced players such as Vermont and South Carolina have by now established what they need to do to compete in the market, particularly with their offshore competition.

Other onshore contenders have discovered the benefits of marketing themselves to 831(b) captives, referred to as “micro-captives”, with annual premiums of less than $2.2 million – a part of the industry that many offshore jurisdictions are content to let them have.  

And while it may have once been less expensive to seek captives offshore, many onshore domiciles are proving this is no longer the case, taking specific steps to implement their own tax advantages. Domiciles like Arizona and Utah do not charge any premium tax; opting instead to charge slightly higher annual license fees.

Oftentimes however, it is not always a matter of choice, as you may be obligated to set up “onshore” (includes Puerto Rico and the USVI) if you answer yes to either of the following questions:

  • Are you are a US company wishing to insure your employee benefits that are regulated under the Employee Retirement Income Security Act?

  • Are you planning to access benefits through certain US federal government programmes, like the Liability Risk Retention Act, or the Terrorism Risk Insurance Act 2002?

Offshore experience

Slightly greyer in their whiskers, today’s offshore domiciles have a few more years under their belt, with Bermuda setting the benchmark in the 1960s. Arriving on the scene next was the Cayman Islands, quickly rising to the top while showcasing a particular flair for healthcare captives.

A head start in the market gave these domiciles the upper hand in producing world-class infrastructures for their clients. These business-friendly environments soon enticed flocks of enormous talent, which continue to add to the success stories of Cayman, Bermuda and Guernsey.

Today, offshore domiciles are able to provide clients with a myriad of benefits and opportunities, including:

  • Third party risk – something onshore domiciles limit to owners and controlled unrelated businesses
  • Flexible risk based regulation – which encourages an innovative and efficient approach to captives
  • Concentrated expertise – helpful if you are looking specifically at healthcare or reinsurance

And as the Western world slowly accepts instability as the new norm, many companies also look to offshores as a secure, unchanging place to do business.

Plenty of room for everyone

At the end of the day, business leaders will always search for the talented domicile that offers the most competitive benefits. Competition is healthy – being viciously pitted against each other is not.  

After all, we are in this industry joined by the shared belief that a different approach to insurance can and should be available. Captive insurance is very much alive and thriving. Last year’s growth (despite a soft market) proves this, with further development predicted for 2018 and a suggested rise in interest in the Latin American and Asian markets.

If innovation truly is at the heart of captive insurance, then space exists for both its onshore and offshore domiciles to shine.