Captive formations in South Carolina continue in a positive direction in 2024, writes Joe McDonald, former director of captives at the South Carolina Department of Insurance

South Carolina offers pure captives, group captives, risk retention groups, sponsored cells, and special purpose captives.

Pure captives are designed for single-parent corporations looking to self-insure their risks, typically suitable for large, financially stable companies.

Group captives are ideal for associations or groups of similar businesses seeking collective risk management.

Special purpose captives cater to even more unique risk financing needs where a captive programme needs to be structured in such a way that it does not meet the statutory definition of another type of captive for which we can issue a licence.

Captives become viable alternatives for companies with specialised insurance needs that can’t be effectively addressed through traditional insurance alone.

New captives in 2023

Last year, there was significant interest in forming new captive insurance companies in South Carolina.

This surge was driven by the state’s favourable regulatory environment, financial incentives, and the rising need for companies to manage risks internally amid a challenging commercial insurance market.

Companies sought to gain more control over their insurance programmes and reduce costs, making South Carolina an attractive domicile for establishing captives.

Popular types of captives and reasons

In 2023, pure captives and special purpose captives were particularly popular. Pure captives were favoured due to their simplicity and control over corporate risks, offering companies a better way to finance and manage their risk and insurance needs.

Special purpose captives gained traction because of their flexibility in handling unique, complex, or emerging risks, which traditional insurance might not cover efficiently.

The popularity of both reflects companies’ desires for customised risk management and risk financing solutions.

Captive formations tracking in 2024

Captive formations in South Carolina continue in a positive direction in 2024, with early indications suggesting a consistent increase compared to previous years. This trend reflects ongoing interest from companies in utilising captives for risk management amid a volatile insurance landscape. The state’s supportive regulatory environment and the rising need for customised insurance solutions are key drivers behind this growth.

Key aspects regulators look for in new captive applications

As the regulator in South Carolina, we focus on several key aspects in new captive applications: financial stability, robust business plans, and sound risk management strategies.

We ensure that applicants have sufficient capitalisation and a clear understanding of regulatory compliance. Additionally, a solid governance framework and the legitimate business purpose of the captive are crucial.

These criteria help maintain the integrity and reputation South Carolina has worked hard to build over the decades.

Captive applications

South Carolina would not approve South Carolina does not approve captive applications which lack adequate capitalisation, proper risk management practices, or a legitimate business purpose.

Applications that fail to meet the state’s rigorous, but balanced, regulatory standards and compliance requirements are also rejected.

The state emphasises solvency and sound governance to ensure that captives established here will be successful for years to come and add value to parent company operations.

Trends among owners of mature captives in South Carolina

Among owners of mature captives in South Carolina, there’s a trend towards optimising captive performance.

This includes expanding coverage lines, enhancing risk management practices, and leveraging captives for greater control over insurance costs.

Additionally, mature captives are increasingly being used for strategic financial planning, including surplus management and investment strategies, reflecting a sophisticated approach to captive utilisation beyond basic risk management.

Effect of a softening commercial insurance market

When the commercial insurance market softens, some companies will reconsider the immediate need for forming captives due to lower premiums in traditional insurance.

However, many will still pursue captives for the long-term benefits of control and stability.

A soft market may slow the pace of new formations, but the value of captives in strategic risk management remains significant despite the inevitable cyclical changes in commercial markets.

Market dynamics affecting captive insurance solutions uptake

Key market dynamics affecting the uptake of captive insurance solutions include increasing cyber risks, evolving regulatory landscapes, and economic uncertainties.

Companies are increasingly turning to captives for tailored, cost-effective options, as traditional insurance may not adequately cover emerging risks.

Additionally, the need for more control, capacity, and stability drives the continued growing interest in captives.

Planned changes to South Carolina’s captive regulation

South Carolina is considering several regulatory changes to better suit the needs of captive owners.

The goal is always to keep the regulatory environment competitive, thoughtful, and responsive, ensuring that South Carolina remains an attractive captive domicile.

Main reasons to choose South Carolina

Captive owners choose South Carolina for its favourable regulatory environment, supportive infrastructure, and the accessibility and experience of regulatory staff.

The state’s commitment to fostering a business-friendly atmosphere, efficient and transparent regulatory processes, and financial incentives are key attractions.

Additionally, the proactive approach of South Carolina’s regulators in supporting captive formations and applying regulations thoughtfully further strengthens its appeal as a premier domicile for captives.