Lori Gorman and Jackie Obusek, both part of the captive insurance companies division of the North Carolina Department of Insurance, discuss what has attracted captives to North Carolina over the last decade, and what new changes could be coming soon to make the state an even more attractive captive insurance domicile

In just 10 years since the North Carolina Captive Insurance Act became law in 2013, the state has become a leading captive domicile, licensing more than 1,400 risk bearing entities since inception of the programme.

North Carolina saw quite a productive year in 2022, with 62 new captives licensed and over 100 cells approved.

Captive owners along with their service providers like to call North Carolina home primarily because the state has a business-friendly approach to regulation, offers a talented work force and boasts a strong economy.

It is not surprising that North Carolina has been ranked as the top state in the nation for business by CNBC for the second year in a row.

With its scenic beaches, award-winning golf courses and picturesque mountains, North Carolina’s climate is inviting for both work and play.

North Carolina legislation

Business leaders as well as the state’s leadership originally crafted the state’s modern captive insurance law to address the insurance needs of North Carolina businesses and to create a positive economic impact to the state by attracting new businesses.

The North Carolina Captive Insurance Act was written not only to meet the current needs of the industry but also with the flexibility to allow for new captive structures and programmes as they arise.

This foresight led to the creation of the state’s captive laws which provide the North Carolina Commissioner of Insurance with much discretion to regulate captive insurers according to each captive insurer’s unique risk profile.

And while our laws compare favourably to those enacted in other domiciles, we have long recognised that legislative changes may be necessary so that the law remains relevant to accommodate emerging trends in the captive industry and to continue to attract business to North Carolina.

To achieve this goal, legislation is currently proposed to extend the premium tax holiday as an incentive to encourage previously formed onshore and offshore captive insurance companies, especially those businesses who have their principal place of business in North Carolina, to redomicile.

Changes are also proposed in lowering the retaliatory tax rate applicable to risk retention groups, which should benefit risk retention groups domiciled in our state.

Why North Carolina?

Captive owners and their service providers have various reasons when choosing among different domiciles.

Leaders that initially formed the captive insurance laws in North Carolina determined it was important to keep the regulatory costs of a captive insurer’s formation and operation low, making it more feasible for business owners of all sizes to employ captive insurance as a risk management tool.

The result is captive insurance laws that provide for reasonable capital requirements that take into consideration captive insurers’ different business plans and offer savings on regulatory costs in comparison with other jurisdictions.

Accordingly, the North Carolina Department of Insurance continues to charge no fees – no licence application fees, no reporting fees, no renewal fees and no business plan change fees (with exception of special purpose financial captive insurer licence application fee).

The only amounts paid by captive insurers to the state of North Carolina are small fees paid to the North Carolina Secretary of State’s Office to submit certain corporate documents and premium taxes at rates that are competitive with those paid elsewhere.

These significant cost-savings measures ensure that North Carolina is an attractive domicile choice for captive formations.

North Carolina’s success

While North Carolina captive insurance companies operate in a business-friendly environment and benefit from the state’s low regulatory cost of captive formation and operation, there is another key factor in North Carolina’s success as a captive domicile.

The state’s leadership has provided the North Carolina Department of Insurance with the resources needed to maintain an in-house team of professional accountants, financial examiners and actuaries to regulate the captive industry.

North Carolina is a competitive domicile, largely because of this in-house professional team of regulators with a focus on excellent customer service and a mission of prudent regulation.

These team members are accessible, knowledgeable and experienced in regulating captive insurance companies and have formed positive working relationships with service providers.

Since actuarial and analysis work is handled internally by the North Carolina Department of Insurance, there are absolutely no outsourcing costs passed onto the captive insurers.

The examination law in North Carolina is also different from most other jurisdictions. Most jurisdictions conduct a regulatory examination of every captive insurer every three-to-five years.

However, North Carolina chooses to use its examination resources with a targeted approach, examining closely the books and records of those insurers that have issues that cannot be resolved through communication and meetings between the North Carolina Department of Insurance and the captive insurer.

Those non-risk retention group captive insurers that are compliant with the captive laws, following their business plans and maintaining adequate liquidity and solvency, are not likely to be examined by the North Carolina Department of Insurance.

Instead, the Department will rely on the independent audited financial statements and actuarial opinions that are provided to the North Carolina Department of Insurance’s analysts annually.

The North Carolina Department of Insurance’s examinations of risk retention groups do occur at least every five years and are conducted in accordance with National Association of Insurance Commissioners accreditation guidelines.

Currently proposed legislation in addition to lowering the retaliatory tax rate applicable to North Carolina-domiciled risk retention groups will also clarify that these insurers will be held responsible for the costs of these examinations.

North Carolina is continuing its strong long-term commitment to the captive industry. From Insurance Commissioner Mike Causey to the North Carolina General Assembly, to the North Carolina Captive Insurance Association, all are dedicated to making North Carolina a great domicile for captive insurance.

As a regulator, the North Carolina Department of Insurance strives to partner with industry using discretion to help captive owners successfully manage their risks.

Inflation and the hardened commercial market are propelling increased interest in captive insurance as an important risk management tool to gain access to reinsurance markets, control costs and customise gaps in coverage.

In this challenging environment, North Carolina is experiencing ongoing growth in the formation of captive insurance companies, including cell structures as well as increased use of existing captive insurers for such risks as cyber and property coverages.

As a result, we anticipate North Carolina’s success as a captive domicile to continue with our portfolio of licensed captive insurers expanding in size and diversity throughout 2023.

We are truly excited to see what the next decade means to the industry and North Carolina’s captive insurance programme.