Joe McDonald speaks to Captive Review on his recent elevation to his new role as director of captives at South Carolina’s Department of Insurance, the appeal of the state as a domicile for captives, and the need for shifting attitudes within the captive sector and insurance as a whole.
Captive Review (CR): Can you tell us about how you got this new role?
Joe McDonald (JM): I started as an intern at the South Carolina Department of Insurance (SCDOI) in 2006 and began full-time in 2008, assisting with coastal property insurance issues and helping to administer a hurricane mitigation grant programme. From there I moved into the captive space. Under the wing of people such as Jeff Kehler and Jay Branham, I was able to start learning about captive insurance by sitting on calls, helping with company licensing and attending conferences. In total, I was at the Department for a little more than 12 years before moving to Dallas to work as the captive and risk finance product manager for the International Risk Management Institute (IRMI). I was there for almost two years. It was a great experience and I’ve learned a lot from my colleagues there. IRMI is an incredible company with some of the most knowledgeable people in the insurance industry. My experience there has had a huge impact on me professionally. When the role as director of captives for South Carolina became available, I was lured back to my home state. I’m looking forward to letting people know the state is here on the scene and open for business with a very experienced staff regulating really great companies.
CR: You’ve been in this new role since February. How are you finding it so far?
JM: On the one hand it’s like putting on an old hat as I’m very familiar with the SCDOI. But it’s also a different role in itself and I’ve managed to get used to it thanks to the excellent people around me like Michael Wise, Dan Morris and Lauren Robertson, as well as the great analysts we have. Overall, it’s a really good fi t for me at this point in my career. Because of this strong team, I feel South Carolina is in a place to keep pushing, continuing to establish itself as a pre-eminent domicile and industry centre. If you have a captive company, we hope that you’re in South Carolina, but if not, it is very likely the state was on your shortlist when you chose your domicile. I’m here to support South Carolina and see that its regulatory processes are as efficient as they can be while driving business and a quality experience. It’s a matter of both chasing new business and valuing the companies we already have.
CR: You’ve mentioned previously that you are pursuing “progressive” policies for South Carolina captives. Could you expand on what these might be?
JM: At its core, this is about acknowledging the quality of South Carolina captives that we have here. Along with the strength of our team, we also have a very solid statute that affords a great deal of flexibility, especially with our special purpose captives. It’s also our approach to applying statutes appropriately, knowing when to apply more or less regulatory rigour. This is a people-driven industry and relationships are of the utmost importance. In South Carolina, we want to emphasise our responsiveness, availability and willingness to meet with people and have conversations about prospective captive programmes. We also want to be out front and welcoming, letting companies know we want their business and for them to understand why South Carolina should be considered.
CR: On a general level, what are the advantages of captive insurance for those firms which may be considering it?
JM: Firms may be concerned because of a lack of availability or affordability when it comes to insurance. If so, senior executives may see an attractive alternative structure using a captive and allowing it to insure the risk of the operating company in a better way. With a captive programme, a firm can often control its own risks better as well as finance and manage them better too. When you understand your risk in a more granular way, if there are fluctuations in the market – since the insurance market is generally cyclical – a captive can be there to help smooth out resulting instability. Also, the commercial market might not price risks as accurately as a captive would price them, or there may simply not be any appetite or availability for a particular kind of risk. That’s when a captive can step in and meet the needs of the parent. When a company understands its risk better and manages those better than competitors, it can present opportunities that can be taken advantage of.
CR: Do you think there are misconceptions about the industry that need to be corrected?
JM: Yes, more often than I’d like. The most glaring one is a misconception that captives are used to avoid taxes and for wealth transfer purposes and schemes of that nature. And while there has admittedly been misuse of these sophisticated risk financing mechanisms in the past, that is not at all the rationale behind the creation of captives. The Internal Revenue Service (IRS) may put fraudulent captive schemes on its ‘dirty dozen’ list, but the intent behind captives, at least in general, has always been proper insurance, a sophisticated form of risk financing, as well as a better risk management approach.
CR: What are the particular benefits of South Carolina as a domicile?
JM: Specifically, it’s our maturity, with the state’s statute establishing captives passed in 2000. We have over 22 years’ experience in the industry as well as a division within the Department of Insurance that is entirely focused on captives. The level of knowledge and experience our regulatory team has is robust, which sets us apart. We also have a competitive statute, support from the legislature, and a solid association that advocates what we do here. Our team is enthusiastic and energised about captives, demonstrated by how the state has been proactive in showing the benefits of captive insurance to the next generation and promoting the space as the best aspect of the insurance industry.
CR: It’s been mentioned the captive sector has previously had trouble attracting young new talent. What are your thoughts on that?
JM: This might be an aspect of the insurance industry as a whole and therefore not limited to the captive space. However, I am confident that that is changing. I see this change across the board with my team and with many of the other service providers in the industry. They are looking to hire new, younger talent and provide opportunities for the next generation to take more responsibilities and leadership roles earlier in their careers. There are some fantastic mentors in the industry who understand all this and there have been some really important efforts made to get younger individuals involved earlier. A great example of this is what Dan Towle has done at the Captive Insurance Companies Association (CICA) with the NEXTGen initiative. This committee is intended to bring the voices of young and new professionals to CICA so they can be involved in the discussions around offering education and networking as they look for ways to advance, or even change, their careers. There were several NEXTGen webinars and panels this past year looking at key considerations for young professionals in the captive space, and there will be more efforts and opportunities like this in 2023 as well. South Carolina has really tried to promote this industry to the next generation and has cultivated and trained some younger people to be in senior positions. I came out of college having studied philosophy and religion with no plans of going into insurance. Yet here I am, because I found a place where there are some really interesting people who are intelligent, well-read, well-travelled and sophisticated individuals who are welcoming, kind and supportive.
CR: How is ESG affecting the industry?
JM: As was discussed at the CICA conference this past spring, the biggest environmental, social and governance (ESG) risk in the captive space is ignoring ESG concerns. More stringent ESG regulations have been promoted in the UK and Europe, and this will continue to have implications in the US, and both captive companies and domiciles should be prepared for it. The efforts in the UK and Europe to further standardise ESG will also definitely impact the US over time and I certainly believe it will be a trickle-down effect of some sort. You’ll see companies that focus on ESG highlight what they do and begin to separate themselves more. These qualitative aspects of how companies interact with society and the environment are at the forefront of the social consciousness at this time, which is important.