Debbie Walker analyses North Carolina’s captive insurance market
Debbie Walker analyses North Carolina’s captive insurance market
There are a lot of reasons why North Carolina has become a leading destination for captive insurers. A team of highly qualified, customer service-oriented accounting and actuarial professionals at the North Carolina Department of Insurance (NCDOI) are responsible for the regulation of captive insurers. The North Carolina Captive Insurance Association provides leadership, education and support to the industry. Experienced and knowledgeable captive managers and other professionals provide services to captive insurers licensed in the state.
But perhaps one of the biggest factors is the state’s captive insurance law, which eschews a one-size-fits-all regulatory approach and provides an innovative, flexible approach to the regulation of captive insurers who call North Carolina home.
The North Carolina General Assembly unanimously passed the North Carolina Captive Insurance Act in 2013. The statutory framework provides a solid foundation for the formation and operation of captive insurers. Additionally, the law provides the commissioner of insurance with discretion and flexibility to regulate each captive insurer based upon each insurer’s risk profile. The law has been modified annually to provide clarity and improve existing provisions.
The captive law contains provisions that result in efficient regulation of licensed captive insurers and provides for regulatory cost savings for the formation and operation of captive insurers.
For instance, the law enables the operation of all types and structures of captive insurers including pure, protected cell, special purpose, industrial insured, branch, association, and special purpose financial captive insurers as well as risk retention groups.
Group and agency captive insurers, along with other types of captive insurers not specifically defined in the law, may be licensed as special purpose captive insurers, if the commissioner deems the applicants’ plans appropriate. This means that most any type of captive insurer may be formed and operated in the state.
The flexibility and discretion built into the law is demonstrated through the capital requirements contained in the laws.
For pure, protected cell, and special purpose captive insurers, the commissioner is granted discretion to establish the minimum capital requirement based upon each insurer’s proposed business plan. Therefore, the required capital will be that amount determined by the commissioner to be necessary to support all obligations of the captive insurer.
The law allows for the NCDOI’s unique examination approach. Under this approach, the NCDOI does not schedule mandatory routine examinations. Instead, examinations are performed as necessary on a target basis, focusing NCDOI resources on the important issues and providing a cost savings to well-run, financially sound captives.
The law does not require captive insurers to pay any fees to the NCDOI (except for a special purpose financial captive application fee). This means no application fees, business plan amendment fees, renewal fee—no NCDOI fees whatsoever, reducing the regulatory costs of formation and operation of captive insurers.
Exemptions from certain annual reporting requirements (such as an exemption from the annual report, if an annual independent CPA audit report will be filed) may be granted by the commissioner upon request. Each exemption request is considered by the commissioner on a case-by-case basis to determine if the granting of an exemption is appropriate. This results in a more efficient regulatory process and another cost savings to the captive insurers.
One of the more recent changes in the law allows the NCDOI to grant provisional licensing approval to a captive insurer applicant that has filed its license application and the NCDOI has made a preliminary finding that the expertise, experience, and character of the owners and managers of the applicant are acceptable.
This provisional approval may be limited by the NCDOI in any way deemed necessary, and the NCDOI may rescind the approval at any time, if the commissioner determines that the interests of the insureds or the public are at risk.
The law provides for the ability of a captive insurer to request an inactive captive insurer status, resulting in a waiver of the state taxes and a possible waiver of financial filing requirements. Insurers requesting this status must have ceased transacting insurance business and have no remaining insurance liabilities.
An insurer with this status is not subject to state tax and may obtain an exemption from one or more of the filing and reporting requirements.
As stated earlier, North Carolina’s captive insurance laws provide for the formation and operation of protected cell captive insurers.
These insurers may establish one or more cells, and those cells may be incorporated (incorporated protected cell) or unincorporated (protected cell).
The law also provides for the transfer of a cell from one protected cell captive insurer to another or for the conversion of a cell to a standalone captive insurer.
In addition to the law that enables the formation of cells by protected cell captive insurers, the North Carolina captive insurance law enables the establishment by any type of captive insurer, with the commissioner’s approval, of one or more separate accounts to which risks may be allocated so that they are separate and apart from the other risks of the insurer.
By enacting the captive law, the General Assembly sought to generate a positive impact on the state’s economy through the receipt of premium taxes, the growth of jobs, and the generation of business revenues by captive service providers.
Like similar laws in other jurisdictions, each captive insurer is required to hold at least one annual meeting in North Carolina.
However, a captive insurer that utilises the services of two or more North Carolina-based service providers may be exempted from this requirement.
North Carolina’s innovative captive insurance law provides for sensible yet appropriate regulation as well as regulatory cost savings to the captive insurers licensed in the state.
The benefits afforded by the law are just some of the reasons that captive owners are making the decision to form and operate their captive insurers in North Carolina.
