North Carolina: A captive domicile success story

Written by Jeff Ellington, vice president of business development at Atlas Insurance Management.

With unanimous approval by the North Carolina General Assembly, the North Carolina Captive Insurance Act became effective in October 2013. Its passage was the result of a concerted effort by the North Carolina Department of Insurance (NCDOI), founding members of the North Carolina Captive Insurance Association (NCCIA), and the support of others who felt NC needed to provide businesses with another alternative for financing and managing their risks. From the start, this group was intent on NC being a major player in the world of captive insurance and, so, the success of NC as a captive domicile has been no accident.

Indeed, the rapid success of captive insurance in NC can be attributed to several factors, among them the state’s progressive captive insurance law, the responsive, business-friendly regulatory approach of the NCDOI, the ongoing support of the NC General Assembly, the support and active involvement of the NCCIA, and the willingness of captive service providers to do business in the state and support it as a captive domicile.

Realising that the state was “late to the dance”, so to speak, the supporters of bringing captive business to NC knew the state would have to distinguish itself from other domiciles, both onshore and offshore, in order to successfully attract captive business. As mentioned above, one of the ways NC has done this is through its innovative captive legislation. Since its inception, the NC General Assembly has also been proactive in approving enhancements and improvements to the captive law through annual adjustments. An example of one of the significant modifications to the NC Captive Insurance Act is H.287, which was signed into law by Governor McCrory in 2016. At the time of this amendment, Insurance Commissioner Goodwin commented that it significantly reduced the regulatory burden on existing captive insurance companies, made the state more competitive to NC business owners wishing to form a captive, made the state more attractive to non-resident captive insurance companies looking to redomicile and, in his opinion, allowed NC to join the top tier of captive licensing jurisdictions.

Some of the features of the legislation, including changes, brought about by H.287, are as follows:  1) the Commissioner is given the discretion to regulate each captive insurer based on its unique risk profile; 2) it allows the formation and on-going operation of all types and structures of captive insurers including pure, protected cell, special purpose, industrial insured, branch, association, and special purpose financial captive insurers as well as risk retention groups; 3)it allows for the formation of other captive insurers not otherwise defined by the act under the special purpose definition, including group captives and agency captives, subject to the commissioner’s review and approval; 4) it sets reasonable capital requirements and gives the commissioner the discretion and flexibility to deviate from the stated minimum requirements on a case by case basis; 5) it does not require mandatory NCDOI examinations but allows for examinations to be performed as necessary on a “target” basis and thereby provides a cost savings to well-run, financially sound captives; 6) it does not require any NCDOI fees with the exception of a special purpose financial captive insurer application fee; 7) it allows for possible exemption from certain annual reporting requirements, such as, an exemption from filing the annual report if audit requirements are met; 8) it allows the granting of a provisional licence under certain conditions; 9) it provides for the granting of a waiver of the in-state annual board meeting if two or more NC service providers are used by the captive; 10) it allows a protected cell to transfer to another protected cell captive insurer or convert to a captive insurance company if approved by the commissioner.

The support of the NC General Assembly in providing funding for the Captive Division of the NCDOI has also been critical to NC’s success as a captive domicile. This funding has allowed the NCDOI to build a team of professionals to effectively manage the licensing and ongoing regulation of captive insurers. The team totals 13, with Commissioner Mike Causey at the helm, plus internal actuaries and examiners who provide sound oversight and validation of the licensing process, as well other regulatory decisions. The NC regulators have developed a reputation for being responsive and accessible with a can-do attitude. The team’s philosophy of being flexible and business-friendly, while still administering appropriate and necessary regulation, has been a big factor in NC’s ability to attract captive business among captive sponsors, managers, and service providers.

From the beginning, the NCDOI’s close relationship with the NCCIA has been instrumental in the success of NC as a captive domicile. The association has been proactive from the start in promoting NC as a preferred domicile for captive business, through its website and other education opportunities, its interaction with NC lawmakers, and its planning, operation and management of the annual NCCIA Captive Conference, now in its sixth year. The attendance at the conference has grown steadily each year and it is now a preferred venue for many captive managers, service providers, and potential clients.  In addition, NCCIA has been a leader in the industry by being the first captive association in the country to adopt a Code of Ethics affecting all of its member companies. The leaders of the association believe the Code will promote the growth of the industry in the state and will help affirm that captives will be managed ethically and responsibly in NC. NCCIA believes that this was the first such code developed specifically for the captive industry.

And, so, the results speak for themselves. The latest figures available show that the NCDOI has licensed a total of 244 standalone captive insurance companies and has approved a total of 531 protected cells and series captive insurance entities. The 244 stand-alone captives are comprised of 185 pure captives, 29 protected cell captives, 20 special purpose captives, and 10 RRG’s. 2018 showed continued strong interest from smaller to mid-sized businesses in forming captives, but additionally, the department saw growth and increased interest in captive formations for the purpose of insuring lines of coverage such as medical stop-loss, workers compensation, professional liability, tenant liability, general liability, and commercial auto. There was also continued activity and interest with captives looking to redomesticate to NC from offshore jurisdictions or other onshore domiciles.

However, for all the positive results, the NCDOI realises there are challenges and obstacles to overcome in 2019 and beyond for the state to see continued growth and success. The department saw 35 stand-alone captives shut down in 2018. The reasons for this vary, including a natural maturing with the owners wishing to go in another direction, changes in ownership or in the operations of the operating company, and changes in federal tax rates. Still, a prudent person would have to consider whether the recent court decisions, lawsuits, and additional disclosure requirements and filings required by the IRS are having an impact on captive owners, as well as those businesses considering a captive as an alternative risk financing vehicle.  Indeed, the current climate could hamper the type of growth NC has seen in recent years from smaller to mid-sized businesses. Additionally, taxation by non-domiciliary states, including self-procurement taxes, could be a deterrent to companies trying to domicile their captive outside of their home state.  And with the opportunities for licensing and regulating different types of captives, such as RRG’s, and captives seeking to cover challenging risks, the department is tasked with being able to insure there is proper underwriting and pricing, as well as adequate capital and reserving.

Regardless of the challenges, NC seems well-equipped as a domicile to meet these challenges and take advantage of the opportunities it continues to garner. And there is every reason to believe NC will continue to be a preferred choice of business owners wishing to establish captive insurance companies in the future.

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