Christine Brown, Deputy Commissioner of Captive Insurance at the Vermont Department of Financial Regulation, speaks with Elliot Hayes, reporter at Captive Insurance Times, about what captive owners should consider when pursuing a redomiciliation, merger, or conversion, and how early engagement with regulators can help ensure a smooth transition.
From a regulator’s perspective, what are the primary motivators behind a captive owner’s decision to pursue a merger, redomiciliation, or conversion? What advice would you give to a captive owner at the very start of this thought process?
Christine Brown: With respect to a redomiciliation or merger, typically the reasons for a company to consider such a move would be that their current domicile is not as responsive as they need. In Vermont, we do our best to operate at the speed of business, understanding insurance decisions impact the operations of the entire organisation. Sometimes we hear it is a reputational consideration, with perceptions about a specific jurisdiction.
If it is an onshore parent company, they sometimes get pressure from the board if the captive is domiciled offshore. Additionally, when companies form in a certain jurisdiction, once they have experience there for a number of years, they may find it is not the best fit for what they are trying to do with the captive, or with respect to the expertise they need. What we hear from captive owners when they move to Vermont is that they value our experience, our team, and our responsiveness.
Companies get the benefit and stability that comes with a 45-year-old jurisdiction with a large regulatory team focused only on captive insurance. We have licensed over 1,400 captives in our history and have seen a lot, which is a value proposition for companies looking to expand their captive operations. Conversions are a little different. Typically, these take place with captives already licensed in Vermont, converting from one type of captive to another.
Generally speaking, it is either that a company has outgrown a cell structure and wants its own licensed captive to be able to do more, so they convert from a cell to a sponsored captive. However, we have also seen it go the other way, where a pure captive will want to form a sponsored captive, for example, if they want to write controlled unaffiliated business (third party) and segregate those risks into cells.
There are many different reasons for these transactions, but my advice to captive owners is to engage early, not only with your captive manager and advisor, but also with legal counsel in both jurisdictions: the one you are leaving and, more importantly, the one you are going to. They can really help with the process because they know the laws of that jurisdiction and can help make sure everything runs smoothly.
A captive’s domicile can significantly affect its operations and value. Could you elaborate on the key regulatory factors captive owners should consider when evaluating a redomiciliation?
Brown: Some of the important considerations for captive owners are regulatory expertise, the resources that a jurisdiction puts around captive regulation, and consistency in both the team and the legislative support. It is important to know that nothing is going to be drastically changed within the jurisdiction where you might lose footing if something was previously allowed and then disallowed a couple of years later. It is valuable to have a jurisdiction where there has been stability so that your operations are not going to be impacted by changes in leadership, staffing, or legislative bodies.
That is one of the primary considerations. But there are also cost considerations. Vermont is definitely not the cheapest jurisdiction, but we are also not the most expensive; we come in somewhere in the middle. Companies do have to look at that when considering where to go. In Vermont, we believe we provide value to captive owners such that, even though the cost may not be the lowest, what they get from us in terms of expertise and responsiveness is worth the investment when it comes to business plan change approvals, examinations and other services.
Could you explain the differences between a true redomiciliation and a merger from a regulatory and legal standpoint? When might one be preferable to the other?
Brown: The choice really depends on the laws of the captive’s current jurisdiction and the desired structure after the move.
Some jurisdictions do not have redomiciliation laws that allow a company to leave. In those cases, we typically see a merger, which involves forming a new captive in Vermont and merging the business from the current jurisdiction into it. This has the same effect as a redomiciliation but involves merging the old company into the new Vermont company because that jurisdiction does not have redomiciliation laws on the books. With a redomiciliation, the process is much simpler. If the jurisdiction allows redomiciliations, it is essentially picking up a company and placing it in Vermont.
It is very seamless: operations move from one jurisdiction to another and the law treats this as a continuation of the original entity. There is no need to form a new entity; the existing one simply becomes a Vermont domestic captive insurance company. A merger, by contrast, involves two separate entities: they form a shell in Vermont and then merge the foreign company into the new Vermont entity.
For a captive owner considering a conversion to a sponsored captive with segregated cells, what are the most significant regulatory benefits and challenges? How does this structure offer flexibility compared to a pure captive?
Brown: The sponsored captive structure with segregated cells offers considerable flexibility, and we see conversions going in both directions. Sometimes a company has outgrown a cell structure and wants its own licensed captive to do more; other times a pure captive will want to form a sponsored captive to write controlled unaffiliated business and keep those risks segregated. From a regulatory standpoint, one of the key benefits is that each cell operates with statutory protection, meaning the assets and liabilities of one cell are legally separate from those of another.
This provides a level of risk isolation that you cannot achieve with a traditional pure captive. The sponsor manages the overall captive, which can reduce the administrative burden for cell participants. However, the regulatory review is more complex because we need to evaluate not just the core structure but also ensure appropriate governance is in place for how cells will be managed. Companies considering this conversion need to have clear documentation around cell participation agreements.
A key challenge in multi-jurisdictional transactions is coordinating with multiple regulators. What are your expectations for captive managers and legal counsel when working with the Vermont Department of Financial Regulation, and what can they do to ensure a smooth process?
Brown: We coordinate with regulators in other jurisdictions when we see moves like this. It is helpful for the company to know that and to facilitate those conversations. We will generally ask for contact information at that jurisdiction and then reach out. We discuss any concerns or issues and also get approval from that jurisdiction to allow the move or redomiciliation into Vermont.
We want to make sure there is no regulatory arbitrage happening, where someone is not getting the answers they want in one jurisdiction and is moving to try to circumvent regulatory requirements that would be required anywhere. From a legal perspective, it is really important to get local counsel involved because they are experts in the law of each jurisdiction and can help with the process, the corporate legal documents, and working with the Secretary of State.
Could you walk us through the essential documentation and steps required for a captive redomiciliating to Vermont? How does the process differ for a captive that is in good standing versus one that may be struggling in its current domicile?
Brown: We have an application form that is specific for redomiciliations because our requirements are slightly different. When a company is redomiciling, they have been in existence for quite a while, so feasibility is already proven. You are not projecting what things might look like; we have real financial statements and historical information that we can look at to see how the captive has been performing. Some of the application is very similar to a new formation: we require corporate governance documents, biographical affidavits, business plans, financial projections, and draft contracts. Where things differ is that, instead of feasibility work, we ask for the actuarial report produced for the current captive and review current audited financial statements.
What is the best course of action when the jurisdiction you are redomiciliating from is uncooperative or has less stringent regulatory and review processes?
Brown: This is a tricky one. We have in the past allowed redomiciliations of companies that are struggling in their current jurisdiction, whether they are on an action plan or have had other issues. We have learned some hard lessons by doing that. We generally feel that if a captive is struggling and it is not about the domicile or the regulator, but more about the captive’s operations and what has happened historically, it is usually better for them to straighten things out where they are before they move, rather than trying to move and then figure it out after the fact.
That said, we also understand that sometimes jurisdictions simply do not have the resources to be as responsive, or may not be as flexible because they lack experience around certain things. If we can gain an understanding from captive owners about those issues and problems generally, we can feel more comfortable when it is not about solvency concerns and is more about timing of approvals.
In your experience, what are the most common oversights or red flags you encounter in the actuarial and financial analysis reports submitted for a captive transformation?
Brown: The biggest red flag would be a company that is not booking reserves to the midpoint, or to the actuary’s expected scenario. We sometimes see companies continuously book toward the lower end of a range, and this can cause issues later on. If you are constantly at the lower end of the range, there is no cushion for loss development and it is better to be at least at the expected level so that reserves are in line with what the actuary anticipates. We have seen issues when companies have been booking at the lower end and then want to redomicile here.
One of the first things we say is that they have to get to the midpoint. We have allowed companies to do that over a period of two to three years, because it can be a significant hit if they try to do it all at once. Another issue we see is financial projections where companies will look at what the actuary has done, but based on their experience or controls they have implemented, they say they expect their experience to be better in the future. Without proof that those mitigating factors are actually doing what the company thinks they will do, it is hard to take credit for them early.
Beyond the necessary documentation, what are the most common pitfalls or unexpected hurdles that can slow down or stall a captive merger or redomiciliation? How can captive owners and their service providers best mitigate these risks at the outset?
Brown: Beyond the documentation itself, one of the most common pitfalls we see is underestimating the time required to coordinate between jurisdictions. Even when both regulators are responsive, there are procedural steps that take longer than anticipated, particularly around getting formal releases or approvals from the departing jurisdiction. If there are delays on that side, it can hold things up for us because we want to understand what is happening and why they are not responding.
Another hurdle is internal corporate governance. Companies sometimes do not fully appreciate the board resolutions, shareholder approvals, and amended corporate documents that need to be prepared and executed, particularly with more complex structures like risk retention groups where more members need to be involved in approving what is happening. We also see issues when there has not been adequate communication among service providers. The captive manager, legal counsel, actuary, and auditor all need to be aligned on timing and deliverables.
Does the regulatory process for a redomiciliation or conversion differ significantly based on the captive structure, such as for a pure captive versus a risk retention group or a sponsored captive?
Brown: There are some nuances. A pure captive is obviously the easiest because there is one owner and one member. When we are getting approvals of the board and shareholder, it is much easier with a pure captive. With a risk retention group, there are more members to consider and more approvals that need to happen. Structurally, group captives are generally more complicated with their corporate documents. Redomiciliation from the perspective of a group or risk retention group requires more work from the regulatory review side, but also more preparation.
From an ideal submission to a final approval, what is a general timeframe for a captive redomiciliation to Vermont? What key factors typically expedite or, conversely, delay the regulatory review and approval process?
Brown: Typically it is a 30-day timeframe, standard with all of our other types of applications. So for a new formation or a redomiciliation, we give 30 days. In terms of what could expedite versus delay the process, the redomiciliation application really does walk someone through it clearly. If the package includes everything we have asked for, it can go pretty quickly.
We sometimes see delays when companies are not using their actuarial estimates and are instead coming up with their own estimates based on their experience, as noted above. That can delay things because we look at that closely to make sure we understand the assumptions going into the financial projections and they are reasonable. Clear communication with the regulators in the state they are in is also a factor. If there are delays there, it can hold things up because we wonder why they are not answering our questions.
