Members of the South Carolina captive insurance market discuss the state’s position as a mature domicile, how it deals with regulatory competition, and emerging risks in the pipeline
With world-class golf courses, sprawling beaches, gallons of sweet tea, smokey barbecue and old-fashioned southern hospitality, South Carolina also boasts a reputable captive insurance market among the onshore US captive industry, supported by its established service infrastructure and competitive operating expenses and tax rates.
The captive insurance industry as a whole has benefitted from the overarching context of a hardening insurance market, and South Carolina is no exception. As a captive domicile, the Palmetto State has licensed more than 300 captives since it enacted alternative risk management legislation in 2000.
Another current broad trend is the Internal Revenue Service’s (IRS) ongoing litigation with the wider captive insurance industry over micro captives that make the 831(b) election under the US Tax Code. However, South Carolina does not have a particular reputation as a ‘tax haven’, as regulatory regimes are abided by to ensure the legitimacy of captive structures as risk management and risk financing vehicles in the domicile.
Dan Morris, deputy director of the South Carolina Department of Insurance (SCDOI), comments that the current landscape of the captive industry in South Carolina is optimistic: “There is a lot of interest, energy and growth in our domestic industry so far in 2021.”
“This is the 21st year of our programme and we have invested in high-quality staff that has allowed us to maintain a solid reputation in the captive community as a knowledgeable, accessible, innovative and business-friendly domicile that partners with captive managers and companies alike to accomplish the goals they have set.”
“In response to the challenging commercial market conditions, new formations are increasing and existing captives continue to seek new and innovative ways to retain more risk and deploy their capital in more meaningful ways,” he continues.
Morris notes that the department is currently working on its ninth new license of 2021, equivalent to the total licensing output of 2020. Gary Osborne, vice president of Risk Partners, adds that the state department also has four more applications currently in the active application stage, anticipating “it seems likely that the state could see 20 or more new formations for the first time in several years”.
Osborne identifies several of these new licensed structures as risk retention groups (RRGs), specifically for commercial auto liability coverage, attributing this to South Carolina’s reputation as a well-regulated domicile for RRGs (as opposed to other states’ unwillingness to recognise RRGs as meeting regulatory or financial responsibility requirements) and understanding of the additional obstacles for transportation RRGs, including intra-state filings and federal filings.
This sunny outlook of increased licenses and applications is echoed by Warren Miller, client relationship manager at Performa, who adds: “I am confident there are new South Carolina captives on the way, especially when you consider the hardening market and recent uptick in captive formations across all domiciles in 2020. I believe it will be a strong next couple of years for South Carolina and I know the captive community here is more than ready for the growth.”
Miller, who is also a board member of the South Carolina Captive Insurance Association (SCCIA), outlines that the advantages of South Carolina as a domicile are rooted in the priority of quality over quantity, which has helped to form a stable captive industry with a measured approach to growth.
He also notes the high level of expertise among professionals in associated industries in the state: “The regulators are knowledgeable and easy to work with, while the local service provider community provides a host of highly experienced professionals across all disciplines, including captive management, legal, actuarial and investment management.”
The road to regulation
The established infrastructure surrounding the core captive insurance industry is vital to the success and growth of a domicile. South Carolina is considered one of the top five mature domiciles in the Western Hemisphere owing to the passage of its Captive Insurance Law in 2000.
The captive statutes of this legislation clarified, among others, the definitions, capitalisation requirements, licensing, reinsurance, tax payments and certificates of authority for captive insurance companies, RRGs and purchasing groups within the state. The legislation was originally introduced at a time when only 12 states had such captive enabling legislation, of which South Carolina was the only southern state actively engaging in a growth strategy. From this dynamic early approach, South Carolina positioned itself to adeptly promote the statutory advantages of having a captive structure, including: reduction of the total cost of risk through stabilisation and control of insurance costs; strengthened and centralised control over insurance programme structure and participants; less reliance on the commercial insurance market, which is prone to volatility; and tailored coverage for a company’s risk profile.
The early promotional efforts of states such as South Carolina helped to establish captives as a legitimate strategic risk management tool for a parent organisation, and to be perceived as a real insurance company subjected to regulatory oversight.
More than 30 states now have captive statutes. Therefore, South Carolina must operate in a competitive environment. The capital and surplus requirements of the captive division of the SCDOI are overall relatively in-line with other onshore domiciles, while the department also offers relatively low application and license fees, and does not charge processing or actuarial fees.
Miller affirms the benefits of the regulatory infrastructure in South Carolina: “I have heard from captive owners time and time again how happy they are to be in South Carolina. The domicile has a dedicated group of regulators that focus exclusively on the captive sector, are business friendly and are always willing to work creatively to find solutions that benefit current and prospective captive sponsors.”
Primary considerations for the regulator when reviewing new captive applications include: analysis of an organisation’s risk exposures, losses and payouts; projected capital requirements and operating expenses; and the performance of its service providers.
“When you pair the robust regulatory framework with an experienced service provider community and an active association in SCCIA, it makes for a great home for any captive,” Miller adds.
Reflecting on the progressive regulatory environment within the state, Morris says: “The statutes are competitive, costs are reasonable, our turnaround time is first-class, and we enjoy great relationships with our service provider community, many of whom are based here in South Carolina.”
Diverse lines
A strength of the captive insurance industry as a whole is that it accommodates diversity; in South Carolina alone, a variety of captive structures offer coverage in healthcare finance, transportation, manufacturing, real estate, workers’ compensation, medical malpractice and professional liability.
South Carolina is also noted for its hurricane and adverse weather coverage owing to its geographic location and climate.
Morris explains: “We have seen many companies adjust their property coverage programmes due to wildfires, the Texas deep freeze and other catastrophes, to become more innovative in their approach to solving capacity problems or utilising excess surplus to take layers of coverage that they otherwise would have laid off in years past.”
He highlights medical professional liability as another notable specialised sector in South Carolina in terms of stop-loss and employee benefit-related coverage: “A considerable portion of our portfolio writes professional liability for hospitals, physicians and other healthcare providers.”
“Even within that specialty, we see a great deal of variety in how the programmes are structured and how they fit within the owners’ broader risk management programmes.”
The traditional liability market has been understandably affected by the COVID-19 pandemic, with Morris identifying a trend among South Carolina’s RRG portfolio towards new formations and changes to existing business plans in this market to take affordability and availability into account.
Osborne adds that, although the hardening market existed before the pandemic, the two factors combined to “[drive] substantial movement into South Carolina in terms of both business and people. This could also have a knock-on benefit to the captive community as more talent and more businesses look to enjoy all that South Carolina has to offer, and hopefully take advantage of the still competitive and strong captive marketplace.”
Moving forward
Looking ahead, the South Carolina captive marketplace will have to position itself to deal with the ever-evolving landscape of emerging risks. The COVID-19 pandemic and subsequent models of remote working made organisations especially vulnerable to cyber risk, while Morris identifies volatility in property as a significant emerging risk.
He explains: “The frequency and severity of catastrophic events has been accelerating and captives have been adapting in response. We have had discussions with owners about emerging risks such as supply chain risk, cyber, business interruption, contingent business interruption and pollution.”
However, he notes that so far, captives are predominantly filling in the gaps from commercial coverages rather than writing large layers, owing to the nature of the exposures.
In a more short-term view of the future, Morris expresses excitement for SCCIA’s upcoming annual conference in September, which will allow industry participants to engage face-to-face rather than remotely following more than a year of remote working.
“Interaction with my fellow South Carolina captive industry colleagues has been mostly limited to virtual calls over the past 18 months due to the pandemic, but as the state reopens, we are starting to meet with clients and partners in-person again,” Miller adds.
