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4 September 2022ArticleAnalysis

Taking the targeted approach

North Carolina captive insurers primarily insure property and casualty risks, with noted growth of licensed medical stop loss captives. Most of the growth we are currently seeing is from small to medium-sized businesses and we expect this trend to continue.

Companies could also stand to benefit from forming their own captive insurance companies as they face a hardening traditional market and battle inflation.

A captive insurance company may provide business owners with direct access to reinsurance markets that have fewer regulatory obstacles than traditional insurance. They may also provide coverage at a lower cost. Additionally, owners are continuing to seek flexibility and customisation that may not be readily available or may be cost-prohibitive in the traditional marketplace.

We expect to see growth in new types of coverages, including employee benefits, cybersecurity and business interruption, which proved beneficial during the COVID-19 pandemic. We also expect to see increased formations of cell and series structures.

Captive insurers such as North Carolina flourish primarily because the state has a business-friendly approach to regulation. The North Carolina Department of Insurance (NCDOI) applies appropriate regulation with outstanding customer service.

North Carolina has modern captive laws that provide for the formation and operation of almost any type of captive. The state has a low regulatory cost of captive formation and operation. The NCDOI provides a dedicated captive regulatory team that is credentialled, experienced, professional and is customer service-oriented. Regulators work with industry professionals and the NC Captive Insurance Association on captive issues.

The department believes it is important to keep the regulatory costs of a captive insurer’s formation and operation low, making it more feasible for a business owner to use captive insurance as a risk management tool, with captive insurance laws that provide for reasonable capital requirements that consider captive insurers’ different risk profiles. This results in savings on regulatory costs in comparison to other jurisdictions.

The NCDOI charges no fees—no licence application fees, no reporting fees, no renewal fees and no business plan fees (with the exception of special purpose financial captive insurer licence application fees). The only state costs to captive insurers in North Carolina are immaterial fees paid to the Secretary of State’s office for submission of certain corporate documents and premium taxes, which are competitive with those paid elsewhere.

In addition, the examination law for non-risk retention group captive insurers in North Carolina is different from that of most other jurisdictions. Most conduct a regulatory examination of every captive insurer every three to five years.

North Carolina uses a targeted approach. Those non-risk retention group captive insurers that are compliant with captive laws, following their business plans and maintaining adequate liquidity and solvency, are not likely to be examined by the NCDOI. Instead, the department will rely on the independent audited financial statements and actuarial opinions provided to the department annually.

Examinations of risk retention groups do occur at least every five years and are conducted in accordance with the National Association of Insurance Commissioners accreditation guidelines.

North Carolina’s economy is strong, as evidenced by our state being named as the top state for doing business in the country by the CNBC. It is appropriate that North Carolina is now a preferred choice as the home for captive insurance companies.

However, there are hurdles ahead and as in many industries in this state and nation, the recruitment of talented personnel is one of the most significant challenges. The insurance industry was experiencing a personnel recruitment challenge before the COVID-19 pandemic began. Now, it’s even more challenging. The industry will need to continue to demonstrate to a diverse workforce that a career in insurance can be interesting as well as rewarding.

Why North Carolina?

We would like to see an extension of the deadline for a recently approved premium tax holiday for captive insurers that re-domesticate to North Carolina extended.

Captives wishing to take advantage of the two-year premium tax holiday must re-domesticate to North Carolina by the end of 2022. Extending this deadline—perhaps to the end of 2023—would provide captive owners and managers sufficient time to review their operations and take advantage of these tax savings.

North Carolina takes a proactive approach to captive insurance regulation. This approach provides the Commissioner of Insurance with significant discretion to regulate each captive insurer according to its unique business plan and risk, while allowing for new captive structures and programmes as they arise in the future.

The captive insurance programme enjoys the support of Commissioner Mike Causey, the state legislature and the NC Captive Insurance Association (NCCIA).

The department, in light of recent court cases and IRS challenges, is also considering ways to strengthen our confidentiality provisions.

Despite being a late entrant in 2013, North Carolina has made a strong long-term commitment to the captive industry. Causey, the NC General Assembly and the NCCIA are all committed to making North Carolina a great home for captive insurance companies. This collaboration results in captive laws that provide the commissioner with significant discretion to regulate each captive insurer according to its own unique business plan and risk.

The NCDOI is a regulator first, but also functions as a partner with industry to help captive owners successfully manage their risks as well as to provide flexibility to allow for new captive structures and programmes as they arise in the future.

Causey has provided the Captive Insurance Company Division with the resources needed to maintain a team of professional accountants, financial examiners and actuaries to regulate the state’s captive industry. North Carolina is a competitive domicile largely due to this in-house professional team of regulators with a focus on customer service and a mission of prudent regulation. These team members are credentialled, knowledgeable and experienced in the regulation of captive insurance companies.

Since actuarial and analysis work is handled internally by the NCDOI’s regulatory team, there are no outsourcing costs passed on to the captive insurers. The NCDOI’s in-house professional team of analysts, examiners and actuaries exhibits its customer service mission through its responsiveness and accessibility providing a domicile with low regulatory costs for the formation and operation of captive insurance companies.