South Carolina Department of Insurance
Joseph McDonald talks to John Savage about the examination requirements for captives in South Carolina, the full process surrounding the inspection, and what captives can expect during an examination
What are the examination requirements for captives in South Carolina?
Examination requirements for captives in South Carolina are, intentionally, quite straightforward. As captive regulators, we take a nuanced approach to regulation in general, as we believe regulation should be based on the nature, scale and complexity of the risk in any captive programme.
Examinations are an essential part of regulation on both the captive and traditional sides, but with unique differences. All captive insurance companies are required to be examined, though the frequency varies based on the type. This flexibility affords us the discretion needed to appropriately examine captive programmes without employing a ‘one-size-fits-all’ mindset.
How frequently are captives subject to examination by the South Carolina Department of Insurance (SCDOI)?
The frequency of examinations in South Carolina depends on the type of captive. We follow the National Association of Insurance Commissioners’ (NAIC) guidance on exams for risk retention groups (RRGs), which requires that these entities be examined at least once every five years. Due to the nature of the risk written in RRG’s, and the fact that RRG’s specifically impact our NAIC accreditation, it is imperative that we keep a close eye on these companies, but without being burdensome when unnecessary. As for non-RRG’s, our statute requires examinations once within the first three years of licensure.
After that, exams are at the discretion of the director. In the past, the foresight of the captive industry in South Carolina, including the SCDOI and the South Carolina Legislature, laid the groundwork for us; they were fair and flexible, but also firm when needed. Over the years, this balanced approach to regulation, based on the risks in a given captive, has proven beneficial to all stakeholders involved, from owners to service providers, and to us as regulators.
Another type of captive with distinct examination requirements detailed in statute are Special Purpose Financial Captives (SPFCs). These entities are not as prevalent in South Carolina as they once were due to changes in the marketplace and other domiciles taking similar statutory approaches with these entities. However, we do still have several in our portfolio of captive companies.
Per statute, SPFC’s are required to be examined at least once every five years, and whenever the director determines it prudent.
Could you explain the examination schedule for captives in South Carolina within the first three years of licensure?
We usually schedule non-RRG exams based on the date we issue the licence, taking into account the availability of our team members who are assigned to the examination. We have several captive analysts on staff who have their Certified Financial Examiner designations. This allows individuals who are not only qualified to conduct examinations but who are also intimately familiar with our portfolio of captive companies to complete the examinations.
What is the rationale behind conducting examinations within this timeframe?
It establishes a specific timeframe, so that companies are aware of them and can be prepared for examinations. It allows our captive team to assess a company in a reasonable timeframe from its inception. Additionally, it allows us to check the pulse of the company relatively early on to make sure it is following through on its business plan and complying with all statutory and licensing requirements. This initial ‘check-up’ is a good practice to ensure the captive has started off and is operating in a healthy way which supports both the financial health and wellbeing of the captive and the overall industry.
Examinations ultimately help to identify issues; such as adverse loss development or poor governance and oversight of risk management procedures. These issues could all lead to insolvency. Examinations also highlight the good aspects of well-run captives so that owners and board members can feel confident in the way their captive is operating.
After the initial examination within the first three years, how often are captives examined by the SCDOI?
This applies to non-RRG’s, which make up most of our captive portfolio. After the initial examination within the first three years, companies are examined at the discretion of the director. It’s said that discretion is the greatest virtue.
The discretion given to the director to conduct additional examinations is helpful to owners, service providers and regulators.
It gives the director the ability to focus on companies that need additional oversight and scrutiny without applying the same rigour to companies that are operating smoothly.
It is noteworthy that the director only requires additional examinations for those companies that are proving problematic, which happens, of course, but is very rare in South Carolina.
How are captive examinations conducted in South Carolina? Can you explain the process and what captives can expect during an examination?
For RRGs, examinations are conducted in collaboration between the captive and the examination team, which is made up of the company’s assigned analyst and supervisor who are both directly familiar with the captive and an examiner.
These exams, as you may anticipate, are conducted in accordance with the NAIC’s Examiner Handbook.
For non-RRGs, the process is similar but follows an internal process that is less stringent, but still risk-focused.
We do not accept the stereotypical caricature of government employees. We strive to be good partners and service providers. We do not consider examinations as ways to ‘mousetrap’ a company, we use them to help companies, stay on course, and remain successful.
How does the SCDOI ensure that captive examinations are conducted efficiently and effectively while minimising disruptions to the captive’s operations?
We work with the captive manager as much as possible, and when necessary make inquiries, or hold meetings with specific representatives of the captive who can shed light on any questions we have.
Efficient and effective examinations that avoid unnecessary disruptions to the captive’s operations are always based on good communication and common goals — these are simultaneously, the health of the captive and the industry, and the reputation of the domicile.
