After an initial spurt of growth in 2000, the Palmetto State, named after South Carolina’s palmetto tree, has settled into its niche of domiciling conservative captives. The state is the fourth-largest US captive domicile and 12th-largest worldwide, according to recent industry rankings, with a captive insurance law passing in 2000 and risk retention groups (RRGs) governed by the captive act.
After an initial spurt of growth in 2000, the Palmetto State, named after South Carolina’s palmetto tree, has settled into its niche of domiciling conservative captives.
The state is the fourth-largest US captive domicile and 12th-largest worldwide, according to recent industry rankings, with a captive insurance law passing in 2000 and risk retention groups (RRGs) governed by the captive act.
“South Carolina passed captive legislation in 2000, and grew very quickly from 2001 through 2005,” comments Paul Newton, senior vice president
of USA Risk Group (South).
“The captive formations levelled off for the next few years, as the domicile became a bit more conservative and started to focus on certain types of captives.”
“While they licensed a fair number of entrepreneurial captives in the early years of the domicile, they tend to steer away from producer driven programmes, and focus on pure captives and other captive forms where the insureds have control over the captive’s operations. More recently, South Carolina has shown moderate growth, with a focus on quality.”
The state has licensed other captives covering a number of industries including healthcare and elder services, real estate, commercial automobile, construction, banking and financial services, and shipping/transport and logistics.
Coverage includes workers’ compensation, general liability and umbrella, medical malpractice and professional liability, business interruption, property, DIC, premises and event liability, terrorism, environmental/pollution clean-up, employment practices, D&O, and fidelity and surety.
Approximately 40 percent of the captives that have formed in South Carolina are healthcare related.
Jeff Kehler, programme manager at the South Carolina Department of Insurance, says: “Since 2000, the industry has grown to more than 160 active companies across a widely diverse industry spectrum.”
The commissioner of the South Carolina Department of Insurance has regulatory authority over captive insurers. With a dedicated staff of 11 employees and the use of outside examination firms, the department is able to regulate captive insurers from regulatory compliance to on-site examination.
“With 11 employees who are dedicated to the industry on a full time basis, we are well equipped to provide a regulatory environment that is prudent but conducive to the growth of the industry in the state,” says Kehler.
“South Carolina itself is a beautiful state that has a climate that encourages outdoor activity 12 months out of the year. With a well developed infrastructure, all of the service providers a captive insurance company needs are here in the state. Every discipline has a captive practice.”
Specific advantages of basing a captive in the state include the permission of direct insurance, including all commercial lines and excess workers’ compensation insurance and reinsurance.
Policy forms are not required to get approval from the insurance department, except for reciprocals and certain designated lines, and there are few investment restrictions for pure captives.
As to downsides in setting up shop in the Palmetto State, Kehler jokes: “The only downside to putting up a captive in South Carolina is if the board of directors like to snow ski. We struggle to provide snow skiing as an activity.”
Doing things differently
“There are generally three questions new captive owners are interested in,” says Kehler. “How long does it take to get a license approved; how quickly can I get a business plan change approved; and how expensive and time consuming are the financial examinations?”
“This is where a mature domicile like South Carolina can really respond well to the captive owners. We have worked with the industry to establish time lines and standards so they know what to expect. Our goal is to consistently beat those timelines.”
He adds that the state has continued to refine its policies and procedures to ensure compliance with National Association of Insurance Commissioners (NAIC) accreditation standards; and for those captives that are not NAIC filers, the insurance department has refined its procedures to make it easier for the managers to file the annual reports, while ensuring that it is capturing the right information to fully understand what is going on with the company. “Our financial reviews are rigorous,” he states, “but adapted to the type of captive company.”
Newton agrees that South Carolina has streamlined the examination and business plan change processes. “For examinations, they utilise contract examiners in some cases, and control the time and cost of examinations. For business plan changes, they have an analyst designated to handle all change requests, and monitor the response time. This has provided a vast improvement over the response time from previous years.”
Though it may be conservative in its captive choices, the state has proved unique in its creation of an alternate funding source to attract captive insurers that are finding it tricky to access capital markets for traditional securitisation deals.
In March 2011, a collaboration between the state’s captive insurance market and economic development authority created the South Carolina Insurance Funding Programme, which was aimed at stimulating life captives that are owned by insurers and were considered to be too small to go through traditional securitisation routes.
NAIC road bumps
As for the future of captives in South Carolina, Newton and Kehler point to the US Federal Insurance Office, the NAIC, and the growth of 831(b)s as some of the challenges that not only the state will have to address, but the country will too.
“Captives will be challenged on a number of fronts in the future. One area is encroaching regulation,” asserts Kehler.
“The NAIC and the Federal Insurance Office represent two organisations that seem to show a keen interest in regulating captives more rigorously.”
He adds that the IRS may show additional interest in those high net worth individuals who have established micro captives for wealth transfer. “This is not to say these individuals have done anything wrong, it just appears the service is interested in looking into how they are structured, and if they meet the various tests to qualify for insurance treatment under the tax code.”
Solvency II is another important issue, as the regulation pertaining to European captives may have a knock-on effect for the US. Kehler agrees that there may be trouble for domiciles seeking equivalency. “There have been conflicting articles on this issue as some have stated little change in capitalisation will be required, others have said additional capitalisation as high as 300 percent will be required for some captives. This high degree of uncertainty has caused some captive owners to redomicile their captives, and not wait around for the answer.”
“General economic conditions can impact captives as well. The slow economic recovery and tight financial markets can produce challenges for the captive industry. For example, letters of credit used for capitalisation may be less attractively priced, or terms may be more restrictive. With interest rates being quite low, it is difficult for captives to generate investment income which could impact some captives that are relying on investment income to a substantial degree. Both of these issues may drive captive owners to rethink their plans of operation and how effectively the captive is utilising its capital.”
Newton adds that alongside tremendous growth in the number of 831(b) (small insurance company) captives in various domiciles, there is bound to be growing scrutiny on risk distribution and types of coverage being insured through these vehicles. “South Carolina has continued to monitor this and prudently regulate what risks are insured through captives they regulate.”
However, Kehler is resolute that overall, the captive industry is doing remarkably well in a challenging time. “New formations are up in almost every domicile around the world,” he concludes. “This demonstrates the resilience of the industry and the value captives provide in risk management and financing.”
