Lori Gorman of the North Carolina Department of Insurance answers Captive Review’s questions about the state’s cell captive programme – which has for a number of years housed the most cell captives of all US domiciles
Can you give some background on North Carolina’s history in the cell captive market?
LG: In 2013, the year North Carolina’s Captive Insurance Act was passed into law, North Carolina licensed its very first protected cell captive (PCC). Since that time, North Carolina’s captive insurance programme has built a strong history of licensing core protected cell structures and special purpose protected cell structures while approving the related cell structures with individualised capital requirements depending on each entity’s unique risk profile.
CR: What are North Carolina’s current regulations around cell captives?
LG: In North Carolina, the Act defines a PCC as a captive insurance company with capital and surplus provided by one or more sponsors, insuring the risks of separate participants through contracts and funding its liability to each participant through one or more protected cells while segregating the assets of each protected cell from the assets of other protected cells and from the assets of the PCC insurance company’s general account.
A protected cell then is a separate account established by a licensed PCC insurance company and for which assets and liabilities are segregated and insulated from the remainder of the PCC insurance company’s assets and liabilities. We continuously review and assess the Act to ensure it remains relevant to meet the needs of industry. In 2022, a change was made to our law to cap premium taxes similarly for protected cell and special purpose protected cell structures.
CR: North Carolina has the most captive cells of all US domiciles, and consistently has the greatest number of new cell formations. What is it about North Carolina that has enabled it to emerge as the leading US domicile?
LG: The captive industry overall is adept at meeting new trends and emerging risks, and cell structures, being quicker to establish, may be especially well-suited for offering tailored coverages designed for unique risks difficult or too costly to place in the commercial market. North Carolina’s captive insurance laws provide the Commissioner with a great deal of discretion in regulating captive entities.
This flexibility allows our in-house team of analysts, examiners and actuaries to respond quickly to innovative approaches so that we are able to meet the needs of captive owners and regulate each captive insurer according to its own unique risk profile. The North Carolina Department of Insurance (NCDOI) is committed to its business-friendly captive insurance regulation, which allows companies to form and operate at a low cost. North Carolina’s premium tax rates are competitive, with a $200,000 premium tax cap for PCC insurers and special purpose PCC insurers with more than 10 cells.
CR: What are some of the main benefits to setting up a captive cell?
LG: Small to mid-size companies facing issues obtaining coverage in the traditional marketplace and now seeking alternative risk transfer methods to better manage their own risks will find that cell structures can provide a cost-effective option for a variety of risks. The lower capitalisation requirements, shared operating costs with available service providers, and access to reinsurance markets are some important benefits to forming a cell captive.
A primary benefit of cell structures is that captive cells offer a great deal of flexibility to owners. For example, an incorporated cell as its own separate legal entity with its own board of directors can be easily transitioned into a pure captive. The ability to convert to a standalone captive from a cell structure may be especially appealing to those captive owners that wish to start with a small captive insurance programme and expand to include additional lines of coverage while growing and maturing into a single parent captive over time.
CR: How many new cell captives formed in North Carolina last year, and how many have formed so far this year?
LG: The Department approved more than 80 cell formations in 2023, and approximately a dozen structures have been approved thus far in 2024. In recent years, increased Internal Revenue Service scrutiny of 831(b) captives has presented a challenge impacting the formation of some small captive insurers due to the uncertainty around tax treatment of these transactions.
CR: What have been the biggest drivers of growth in North Carolina’s captive cell industry?
LG: In the past large companies formed pure captive insurance companies, but with the hardened commercial market seen over the last few years, more small to mid-size companies are seeking alternative risk transfer strategies as a means to manage their risks more cost effectively.
CR: What is the general profile of companies that decide to set up a captive cell in North Carolina? How much premium do they write?
LG: The profile of captive cell owners is varied. Captive insurance cell structures can benefit many organisations that wish to supplement their risk management strategies and are not limited to any particular industry. Many such cells in North Carolina are formed by businesses located in states nationwide with premium levels that would qualify as small captive insurance companies. The top five industries represented in North Carolina currently are healthcare, financial, transportation, retail and construction industries.
CR: What are the benefits of domiciling a captive onshore in the US?
LG: The previous tax benefits of domiciling a captive offshore versus onshore have changed in recent years making US domiciles more attractive than ever due to the more favourable tax treatment here in the US. Busy work schedules, travel costs and increased operating expenses are some of the barriers that make traveling to offshore domiciles less appealing since the COVID-19 pandemic.
North Carolina offers a convenient central east coast location, with the nation’s fifth largest airplane hub and second largest highway system. North Carolina is consistently named one of the best business climates in America and because of legislation effective July 2, 2024, captive insurers that redomesticate to North Carolina are exempt from paying premium taxes in the year of redomestication as well as the following year. With our beautiful beaches, award-winning golf courses and serene mountains and valleys, we think you’ll find the climate’s just right for work and play.
CR: Against the competition presented by other US domiciles, how will North Carolina ensure it remains the clear leader for captive cell solutions?
LG: Since the outset, the primary goals of North Carolina’s captive insurance programme have been to meet the needs of the state’s business owners and to attract businesses to our state, generating a positive economic impact to our state’s economy. Commissioner Mike Causey has consistently demonstrated his commitment to the captive programme with a flexible, business-friendly approach to regulation. With this commitment, together with the collaborative support of the North Carolina Captive Insurance Association and the legislature to ensure the Act remains relevant, we feel that North Carolina’s programme is well positioned to continue to grow by serving innovative captive owners seeking to benefit from the flexibility of captive cell structures.
Additionally, since the passage of lowcost formation and operation captive insurance laws in North Carolina, the Department has developed positive working relationships with reputable captive service providers and our dedicated captive analysts consistently strive to provide an excellent customer service experience. As a Department, we prioritise our team’s attendance at networking events and educational opportunities to ensure our analysts are knowledgeable about evolving trends and emerging risks in the industry. These efforts will complement our flexible law to ensure North Carolina remains a leading captive domicile well into the future.
