With 148 active captive companies currently domiciled in the state and legislation that dates back to 2000, South Carolina is well positioned as an experienced destination for potential insurers.
With 148 active captive companies currently domiciled in the state and legislation that dates back to 2000, South Carolina is well positioned as an experienced destination for potential insurers.
Jeff Kehler, programme manager of the South Carolina Department of Insurance, believes that the state entered the captive space at exactly the right time.
“In 2000, there were only 12 states that had captive enabling legislation, and only four of those were actively pursuing a growth strategy. At the time, we were the only Southern state actively reaching out to promote and grow our captive industry.”
Derek Martisus, head of US insurance solutions at Performa, agrees that South Carolina’s proactive reaction to the “captive formation explosion in the early 2000s” has been a driving factor in the state’s success.
“The service providers within South Carolina reacted quickly and adeptly to create an environment where captives can find all of their service providers, from attorneys to captive managers, within a few blocks of each other. This infrastructure is second only to Vermont’s. Those early pioneers in the captive space in South Carolina should be thanked for their work.”
First-hand experience
Coverage provided in South Carolina includes workers’ compensation, general liability, medical malpractice and professional liability, property, and terrorism. The state also covers a number of industries comprising commercial automobile, construction, and banking and financial services—while approximately 40 percent of the state’s captives are healthcare-related.
Kehler says that South Carolina’s experience and expertise in the healthcare arena led to an influx of companies doing business in the state.
“Early in South Carolina’s existence as a captive domicile, the risk retention industry was very active, as the mainstream insurance industry was skittish on this class of business.”
“We were keen to attract this business as we quickly developed expertise in understanding the business and the solutions to the problems. It enabled us to assist the captive owners in addressing their risk financing needs.”
Total Captive Solutions, a captive manager and third-party administrator based in Georgia, has personal experience of South Carolina’s healthcare hospitality, with a risk retention group (RRG) domiciled there.
According to Michele Matthews, COO of Total Captive Solutions, Red Clay RRG began to write medical malpractice business through the firm in January 2008.
Matthews says: “[We] chose South Carolina because it was a very flexible location; also at the time it was a newer domicile. South Carolina was very appealing to us especially because, we’re located in Georgia, and the physicians within the Red Clay RRG that we are writing for are located in Alabama. So logistically it made a lot more sense than choosing somewhere like Vermont.”
Cory Brown, CFO of Total Captive Solutions, says that the South Carolina Department of Insurance was an integral part of the process, and a great help too.
He says: “The South Carolina Department of Insurance really worked with us. We had to ensure that we got everything licensed and registered before the Red Clay RRG physicians’ policies expired at the end of 2007, so that we could start to write business at the start of 2008.”
“Having a quick turnaround is very important when it comes to renewing or rewriting policies. And we have to remember that it isn’t just us (the captive manager) that has something at stake. Through Red Clay we now have 80 individual insured physicians to think about so there are a great number of people who rely on the department of insurance.”
Clash of the Carolinas
In May, the story broke that North Carolina was set to become the next US state to allow the formation of captive insurance companies. Having another active captive domicile in such close proximity could spell trouble for South Carolina as the states vie for potential business.
But Martisus feels that it isn’t something that South Carolina needs to worry about. “I wouldn’t expect North Carolina to have a significant impact on South Carolina’s business. There are currently more states with captive legislation than not, so there will always be competition with respect to captive domiciles.”
“The creation of another captive domicile isn’t earth-shattering news. Given South Carolina’s tremendous existing service provider infrastructure, future captive owners will continue to look to South Carolina to be home to their alternative risk vehicle.”
Brown explains that, as there is so much competition for captive domiciles nowadays, captive managers are starting to pay more attention to other factors including, the efficiency of a state’s department of insurance and premium tax.
He says: “I feel that it really comes down to the staff of a particular state’s department of insurance. A domicile also needs to be on the forefront of legislation and ensure that the governor and the legislator are receptive to any changes.”
“South Carolina now has 12 to 13 years of experience in this field, so they are well aware of the pros and cons of certain structures. So if companies meet the criteria of the department of insurance and have quality programmes, South Carolina will be very flexible and work with them.”
Kehler feels that the additional competition will have an effect on the whole industry, not just neighbouring states, as it will limit other domiciles’ opportunity for growth.
“On the other hand, the newer domiciles don’t have the sophisticated infrastructure, the regulatory expertise and staffing to enable captive owners to maximise the business opportunities of their captives. So, if you do your job right, the impact will be minimised.”
South Carolina does have a card up its sleeve, with new legislation that has the potential to attract business to the state.
H3797, which is currently in the hands of the South Carolina Senate Banking and Insurance Committee, “aims to make the state both friendlier to captive owners and also more desirable to cell captives,” says Martisus.
“In an effort to make South Carolina a more captive-friendly domicile, the new legislation will allow captives to become dormant for a period of time and lower costs for captive owners during that period. Clearly, this aims to retain captives that may otherwise dissolve, in hopes that a use will be discovered for the captive in the future.”
“What some feel to be the most important aspect of the legislation pertains to cell captives. The legislation would permit cells to be either incorporated or unincorporated. While perhaps a little uninteresting to those not involved in cell captives, it will immediately put South Carolina in the mix for protected cell captive formations.”
Plan of action
Now that more than 30 US states have adopted captive legislation, it isn’t any wonder that South Carolina is focusing on the future, as it bids to maintain a steady flow of business.
Kehler feels that the key to attracting new business to the state lies in consistency and reliability. “[It] is about having a consistent, predictable, and reliable regulatory environment that your clients can depend on.”
“The second dimension is one of orderly, consistent, quality improvement. This is not accepting the status quo of doing the same thing over and over again because we’ve always done it that way. It is about thinking through the processes and procedures to ensure we are focused on building value in a sensible, cost-effective manner.”
Martisus adds: “I like to say that the secret to a successful captive domicile is that there is no secret. The moves that need to be made fall within the realm of common sense. Specifically, South Carolina needs to move the regulatory process thoughtfully, consistently and quickly.”
“Finally, [South Carolina] must ensure that [its] service provider network is strong. As the infrastructure grows, so does knowledge of the alternative risk space and service providers make [a] domicile a knowledge centre as well as a business centre.”
