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BVI—A clear vision of the future

The British Virgin Islands has quietly become the fourth largest captive domicile in the world

By Michael J. Moody, MBA, ARM

Worldwide, 2005 represented a year of moderate captive growth. Both offshore and onshore domiciles have generally experienced a softening compared to the torrid pace of the past three or four years. Despite this trend, one domicile had another active year for captive formations by licensing 68 new captive insurance companies. This represented over a 10% growth rate and allowed the British Virgin Islands (BVI) to lay claim as the world’s fourth largest captive domicile.

According to a BVI Financial Services Commission (FSC) Statistical Bulletin issued in April 2006, the jurisdiction ended 2005 with the total number of licensed captives at 380. For many observers of the captive movement, this will come as a surprise. The BVI was not one of the first jurisdictions to enact captive legislation. Despite this fact, they have been one of the most determined regarding their business model.

Facts & figures

The FSC Bulletin states that the United States remains the dominant region for captive parents. However, the BVI is also seeing growth from regions like Guernsey, Taiwan, Switzerland, the Middle East, and South America. In addition to this excellent geographic spread of business, there also has been a significant distribution of captives from an industry segment standpoint. The Commission reports the following breakdown: construction (21%), finance and insurance (18%), real estate (16%), health care (16%) and others (29%).

All of this growth is welcome news to the captive service providers in the domicile. Simon Owen, chairman of the BVI Association of Insurance Managers, is pleased with the recent figures. Owen believes that it is one more indication that the BVI’s vision for a complete financial services sector is continuing to materialize. “It’s not just captives,” he notes, “a number of other financial service sectors have been successful here, such as the mutual fund industry and the trust industry, allowing our clients to use the BVI for all their business and wealth management needs.” This is affirmed by the BVI’s most successful venture to date, its company incorporations. The government has recently announced that more than 700,000 companies were registered in the BVI, adding over 58,000 last year alone.

Owen believes that the array of financial services available to organizations is one of the key reasons for BVI’s rapid captive growth. “We are more than just a captive domicile; we are a financial services domicile,” he says. He also points to the cost effectiveness of the captive domicile when compared with most others. “We are very competitive in terms of the government fees, start-up and ongoing costs, and other captive expenses.” And he believes that this competitiveness may well have led to the domicile’s attraction to so many mid-sized captives. For the most part, many of these mid-sized captives have been able to take advantage of two specific IRS tax effective structures. Both 501(c)15 captives which are limited to $600,000 annual premiums and 831(b) captives which have an annual premium limit of $1.2 million, have frequently found homes in the BVI. While the BVI has broadened its scope by attracting larger single parent captives, agency captives, and other group captives, Owen is quick to point out that, “mid-sized captives will always be welcomed in the BVI.”

Another major reason for the growth in the BVI, according to Owen is “the access to the regulators.” He says that the BVI regulators are “stringent, yet commercial. Our close working relationship with the Financial Services Commission is a major factor of our success.” As market conditions change, captive parents may require a modification to their business plan. “This can be done easily and quickly,” says Owen. He notes, that unlike many other domiciles where the regulators can effectively slow the formation process, in the BVI, the FSC endeavors to help the captive owner. He also points to the flexibility that is afforded by the current legislation as a major selling point for the domicile.

Finally, Owen says, “the infrastructure of the BVI service providers has increased markedly over the past few years.” Several larger, international captive managers and other service providers have been attracted to the BVI in recent years. This has resulted in additional resources and capabilities for the total marketplace. For example, the number of insurance managers has grown from 15 to 23 at the end of 2005. As time goes on, this will increasingly work to the advantage of the captive owners, since it will result in more service provider options and a stronger pool of experts and professionals.

Eye on the future

There is no question that the BVI is acutely aware of its heritage. Its entry into the insurance business arena was born out of the need for mid-sized business to find a cost-effective risk financing option. And while the BVI is working to expand its business base, mid-sized captives have been its claim to fame. Regardless of the future direction of BVI’s captive landscape, mid-sized accounts will remain a mainstay of their business plan.

One example of this commitment has been the enabling legislation that will attract existing captives via redomicilation. The redomicilation legislation was passed to make it easier for existing captives to move to the BVI. “Assuming they are properly licensed in another domicile,” Owen says, “a captive’s transition to the BVI becomes a very smooth and easy process.” Since this feature was incorporated into the legislation, captives in other domiciles have noticed how cost-effective the jurisdiction is and have shown a desire to transfer to the BVI. Owen says that a number of captives have benefited from this feature already. He believes that this may be more widely utilized by captive owners in the future.

The BVI has also been able to take advantage of the latest trend regarding funding of U.S. employee benefits. Global Energy Resource Insurance Co., a BVI captive of Atlanta, Georgia-based AGL Resources, Inc., has recently been given approval by the U.S. Labor Department to fund benefit risks through a Hawaii branch of their BVI captive. It is expected that AGL will reinsure its long-term disability, accidental death and dismemberment, and term life coverages through its captive insurance company. It is anticipated that the captive arrangement will result in a cost savings for AGL, while providing a coverage improvement for the employees. This marks the first time that an offshore captive has been utilized in the financing of U.S. employee benefits and represents yet another opportunity for BVI captive owners.

As noted earlier, the BVI is the prototype for a full service financial center. In addition to their traditional captive domiciliary role, they provide a wide array of service offerings that cross a number of financial segments. They are a microcosm of the effects of the convergence of financial service and insurance sectors. They have maintained a highly respected reputation within the world’s financial and regulatory communities while continuing to find new and innovative ways to effectively and efficiently serve their client base.

If you look on the license plates of the local vehicles in the BVI, you will note that it is called “Nature’s Little Secret.” If the BVI continues to maintain its growing pace, it won’t remain a secret much longer. The BVI’s financial services sector has quietly become a world-class financial center and, as Owen notes, “Our diversity continues to be a key factor of our success, so we fully expect the BVI’s inexorable growth rate to continue. We certainly aren’t ready to slow down just yet.” *

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