Members of the North Carolina captive industry discuss the key elements of Senate Bill 347, including a two-year premium tax holiday, and what it means for the outlook of the captive landscape in the domicile
With the captive industry continuously evolving and adapting to sustain the growth in the alternative risk transfer market, as well as addressing emerging risks and withstanding ongoing challenges, it falls to domicile associations and regulators to ensure their regulatory framework is modern, comprehensive and effective.
North Carolina is one of the latest onshore domiciles to do so, with Senate Bill 347 proposing amendments to the state’s captive insurance legislation, including, among others, technical corrections and changes impacting the premium tax paid by captive insurers.
Jackie Obusek, senior deputy commissioner at the North Carolina Department of Insurance (NCDOI), explains the context behind the introduction of the bill. “In just eight years, North Carolina has become the fourth largest US captive domicile and the eighth largest global captive domicile,” she says. “In order to remain relevant and competitive, North Carolina recognises the need to frequently update its captive insurance laws.”
SB 347 passed the North Carolina House of Representative in March after having passed the Senate in late 2021. However, the Clerk of the House since determined that the chamber had exceeded the terms of the continuing resolution it was operating under. The bill was then recalled, reconsidered and referred back to the Rules Committee.
Currently, the North Carolina legislature is adjourned. Tom Adams, president and CEO of the North Carolina Captive Insurance Association (NCCIA), says: “The House and Senate will reconvene on 18 May. We expect the House will then reconsider SB 347 and it should be enacted later in the month.”
Members of the North Carolina captive industry spoke to Captive Insurance Times to discuss the key elements of the bill and what it means for the future of the captive landscape in the domicile.
Annual audit exemption
The proposed amendments would allow any sized captive to apply for exemption from the annual audit and statement of actuarial opinion requirement at the commissioner’s discretion. Previously, eligibility for this exemption was restricted to captives with less than US$1.2 million in written premium.
Diana Hardy, audit partner at RH CPAs and incoming NCCIA chair, explains that, from an accounting perspective, it is important for a captive to fulfil this requirement because an audit, in combination with an actuarial opinion, can offer a level of assurance to a captive owner that their financial statements are true and accurate.
“Since captives are required to have a captive manager in North Carolina, it allows captive owners the ability to monitor their captive manager to ensure they are properly doing their job and monitoring the results,” Hardy adds.
This is affirmed by NCCIA’s Adams. He explains: “The reason why we have regulation of the captive industry is to protect the public. This is why NCCIA has promoted this provision since the statute’s enactment in 2013.”
The revised provision reads: “Upon written request by any captive insurance company, the commissioner may grant an exemption from compliance with any or all provisions of this section if the commissioner finds that compliance would cause the insurer a financial or organisational hardship.”
This modification of wording makes the audit exemption provision for captives “substantially similar” to that for traditional insurers, notes NCDOI’s Obusek.
A captive can apply for exemption from this annual audit and actuarial opinion requirement based on financial hardship, to be reviewed by the commissioner on a case-by-case basis. NCDOI recommends that such requests should be made at least 90 days prior to the captive’s fiscal year-end.
Outlining why a captive may apply for exemption for this particular piece of reporting compliance, RH CPAs’ Hardy says: “A captive may consider requesting an exemption for an audit when the cost of the audit is too high as a percentage of the total revenue. For example, if a captive is only paying $100,000 premiums and annual audit is $8,000, this results in an eight per cent cost of total revenue, which may be considered excessive.”
SB 347 also contains amendments authorising the commissioner to conduct a financial analysis of information submitted or obtained as part of the legislation’s captive insurance law financial analysis section. Unless specified, the captive insurance company in question is not required to pay the expense and charges of this financial analysis.
Governance
The second key provision of SB 347 concerns technical changes to the terminology surrounding the governance of a captive insurance company.
As well as including a clarified definition of “governing board” (“the board of directors or officials possessing similar authority”), the amendments then replace all instances of “directors” with the phrase “governing board” or “governing board members”.
Lori Gorman, newly-appointed deputy commissioner of NCDOI’s captive insurance companies division, explains that this change will provide clarification going forward, as not all captive insurers are formed as stock insurers having a board of directors.
This substitution refers to all provisions concerning the licensing, authority and confidentiality of captives in North Carolina. For example, existing requirements stipulating that at least one member of the board of directors or subscriber’s advisory committee must be a North Carolina resident are replaced with the requirement that at least one member of the governing board must be a resident of North Carolina.
Similarly, the requirement that the articles of incorporation or bylaws of a captive formed as a corporation may authorise a quorum of its board of directors to consist of no fewer than one-third of the fixed number of board members is amended so that the organisational documents of a captive may authorise the governing board to consist of the same proportion.
Other modifications to the governance of captives in North Carolina under SB 347 include designation of a captive manager approved by the commissioner to a licensed captive insurance company at all times.
The bill also introduces “failure to operate in accordance with the plan of operation approved by the commissioner” as a new ground for suspension or revocation of a captive licence.
The broadened term of “governing board” is a reflection of the captive industry’s increasing focus on corporate governance, which Hardy describes as “the guiding light by which a company directs its business”.
She adds: “As an industry as a whole, we are trying to bring focus on what a board should be focused on — that is, direction rather than management. A board is charged with looking at the big picture and setting the strategic direction of the policies and business decisions for a company.”
Therefore, it is important to have sound governance practices, as this is vital for the long-term success of any captive. Gorman says: “Strong corporate governance practices can help focus a captive insurer in aiding the risk management programme of its insured owner. Good corporate governance can also promote a positive regulator relationship by identifying and addressing any issues early on before they become serious.”
Premium tax
Most crucially, the draft changes of SB 347 would provide a premium tax holiday for two years for captives that redomesticate to North Carolina.
Hardy says: “The key provision of the proposed legislation is the premium tax holiday. Should the bill pass, it will allow captives which redomisticate to North Carolina, whether offshore or onshore, a waiver for premium taxes for two subsequent years.”
The revision determines that, providing it obtains approval from the commissioner to redomesticate and operate as a North Carolina-domiciled captive on or before 31 December 2022, a captive formed and licensed under the laws of a jurisdiction other than North Carolina is exempted from premium taxes for the year in which the redomestication occurs, as well as the following calendar year.
The bill notes that this subsection expires for taxable years beginning on or after 1 January 2024.
This key amendment is advantageous to redomesticating captives and their operations. NCDOI’s Obusek says: “Unpaid premium tax will result in a cost savings to those captive insurers redomesticating to North Carolina, which could be used in many ways, such as offsetting operating expenses or for professional services.”
NCDOI’s Gorman explains that before North Carolina passed captive legislation, large North Carolina businesses and other out-of-state businesses formed their captives in other jurisdictions.
This amendment is specifically designed to entice these owners back to North Carolina, with Gorman adding: “Modern laws and the support of state leadership make North Carolina an attractive domicile.”
Anticipating that this accounting incentive will be effective, RH CPAs’ Hardy notes: “Recently, we have seen an influx of foreign captives moving back onshore. Captives have various reasons for looking at different domiciles. This incentive will allow North Carolina to continue on the steep growth curve it has experienced over the past several years.”
Obusek adds: “As well as the premium tax holiday for captive insurers redomesticating to North Carolina, an amendment is also included for consistency to require special purpose captive insurers with a cell or series structure to pay the same premium tax as that imposed on protected cell captive insurers.”
Summarising the provisions of SB 347, Adams describes the bill as a continuation of the refinement of North Carolina’s legislation. “It is a great economic development tool that enjoys great bipartisan support. I expect that activity and support for its evolution to continue,” he comments.
While other domiciles may follow suit in adopting similar redomestication incentives, the captive industry in North Carolina remains confident that their domicile stands out as unique.
“North Carolina captive insurance companies operate in a business-friendly environment and enjoy low regulatory cost of captive formation and operation.”
“North Carolina is a competitive domicile largely due to its in-house professional team of regulators, with a focus on customer service and a mission of prudent regulation,” Gorman concludes.
