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2013 Vermont Captive Insurance Association (VCIA) Special Section

BVI looks to the future

The territory has been attracting captives from around the world

By Michael J. Moody, MBA, ARM

The British Virgin Islands (BVI) is one of the Caribbean's most active captive domiciles. A primary reason for this is that they are one of the few domiciles that is a true full-service financial service center. Among other things the BVI can lay claim to is being the largest domicile for corporate registrations, which now stands at well over one million "International Business Companies." Organizations from around the globe have found that the user-friendly environment that the BVI officials have established for incorporation is second to none. As a result, all financial service sectors have seen a corresponding increase and growth as well, despite the worldwide recession.

Recently, one of the financial service sectors—captive insurance companies—has worked to develop a long-term strategy that will result in a more diverse client-centric sector. Attempting this while struggling with the world recession as well as an extended soft insurance market has been a difficult task.

Mid-course correction

From the beginning, the BVI realized that one of the primary prospects for their captives was the middle market account. BVI's realization was based primarily on a special provision within the U.S. tax code section 831(b). Under this provision U.S. captive owners are taxed only on the captive's income from investments. Any profits that the captive realizes from underwriting are exempt from the IRS code. As a result of this focus, BVI quickly began to see significant growth from 831(b) captives or, as they have become known, "mini-captives." At one point, the 831(b) captives made up more than 50% of the BVI's captive business.

However, several years ago, the BVI financial service sector realized that the existence of these captives is totally dependent on the IRS retaining this special section of the Code. Given the current financial issues facing the U.S., the BVI became concerned about the continued viability and sustainability of the 831(b) captives. BVI realized that the loss of this provision of the Code would have a profound impact on their captive business. As a result, the regulators have worked to establish a more diverse captive base both within the U.S. as well as internationally.

The BVI has always been known as a consumer-concentric domicile that maintains high standards, while offering a flexible and user-friendly attitude towards captive feasibility and formation. While the BVI maintains a strong tie to the middle market and continues to foster the utilization of 831(b) captives, it also has been actively working to attract other prospective captive owners. Within the U.S., BVI is reaching out to larger clients who are interested in the flexible approach to captive formation that the nation is famous for. Among other things, BVI is working with groups like the American Society for Healthcare Risk Management (ASHRM) to attract additional medical professional-related captives. The current M&A activity that is going on in the health care field lends itself to captive growth, and the BVI is attempting to develop strategies that will take advantage of this movement.

Additionally, the territory is also working toward a more internationally diverse approach to captive formations. As noted above, the BVI is already home to over one million corporations, so it is trying to capitalize on this. At this point, BVI is looking towards Asia, Central and South America and the EU for potential prospects. Many of the recently formed corporations have come from these areas. The captive sector is a critical part of the BVI's approach to the total financial service approach that is being utilized. In addition to the captive sector, BVI also has a funds sector, a banking sector and an investment sector.

Domicile selection

One of the earliest and most important parts of any captive feasibility study is the domicile selection. An initial consideration frequently involves the stature of the domicile. In this important area, BVI leads the way in many of the critically important areas and is considered one of the world's leading offshore financial centers. It has long been aware of its reputation for integrity and works to maintain it. BVI has modern legislation, which fully adheres to international standards. It has been an active member of the OECD's "white list." Additionally, BVI also is a member of the Caribbean Financial Action Task Force and played a pivotal role in developing the current legislation regarding anti-money laundering regulations.

Another important aspect of the selection process is the enabling legislation of the domicile under consideration. Captive insurance companies in the BVI have been regulated under the Insurance Act of 1994, and the Insurance Regulations of 1995. However, the BVI Financial Services Commission updated its captive legislation and the new regulations took effect on February 1, 2010. The primary purpose of this update was to provide a more transparent and cost-effective framework for captive owners. Generally, the new law simplifies the governing statute and is written to support the newly created Regulatory Code. The revised Act has made significant improvements in terms of flexibility and user-friendliness. It also includes appropriate provisions that are directed at a robust money-laundering regime.

The law now provides a distinction between general business such as property and liability classes of business, and long-term business that consists of life, annuity and health insurance. Additionally, the insurance business has been further defined by separate categories of insurance licenses. Categories are determined by the nature of insurance business being conducted and where the business is being conducted. Additionally, the BVI has also incorporated its version of the segregated cell captive structure known as the "segregated portfolio company."

The scope of the domicile's infrastructure is also important. Over the past few years, the expertise of BVI's local service providers has been strengthened by the addition of several international service providers, including insurance managers, legal counsel and other third party service providers.

Over the past few years, industry observers have noted a change in the focus of the BVI's captive insurance market. What they have witnessed is a conscious decision to diversify the captive sector. The BVI has come to realize the potential issues that could arise if it continued to focus attention primarily on 831(b) captives. As a result, BVI has become actively engaged in promoting itself as a domicile for larger captives that would typically exceed the annual premiums of $1.2 million that is required by the IRS to qualify as an 831(b) captive. 

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