Investing in the future (South Carolina)

With its progressive, business-friendly regulatory environment, South Carolina is aiming to become the onshore domicile of choice. It recognises that competition among US domiciles is an important consideration and, as a result, has one of the best regulatory environments in the South-East.

The South Carolina Department of Insurance is committed to reasonable and prudent regulation and strives for constant improvement. The goal is to ensure that every captive owner is able to achieve the business objectives for its captive in a robust business environment that is overseen by accessible, professional regulators.

US Captive spoke to director Scott Richardson to find out what makes South Carolina unique and an attractive destination for captive insurance companies.

How long have you been with the department and how would you describe the philosophy of South Carolina as a captive domicile?

I have been with the department a little over three years, after spending more than a decade in the state legislature. I’ve served on the Banking and Insurance Committee and understand captives very well.

Our philosophy is not to be everything to everyone, but to focus on quality companies that are interested in setting up a captive that is properly funded and well managed. I’ve made it clear in the past—we are not interested in gunslingers.

How would you define ‘gunslingers’ and what do they represent that you don’t want?

Gunslingers are those who are more interested in profits than running a proper captive company. They typically don’t want to fund the captive properly, have a questionable business plan and usually have a scheme to siphon as much money out of the company as possible.

Keep in mind, this does not mean that we are not interested in innovation. South Carolina pioneered the securitisation of redundantloss reserves for life insurers to address the issues created by Regulation XXX. In fact, we are entertaining a new innovation that may jump-start that business despite the current issues in the financial markets. Stay tuned, this could be very interesting.

My point is this: we see ourselves as a domicile that is building a stable of thoroughbreds. Over the past few years, we have licensed captives for some of the largest companies in the world that want to be in a domicile with a sterling reputation.

But isn’t there a lot of competition among the domiciles, particularly the US domiciles, which want to attract the same kind of companies? Don’t statistics matter?

Yes, and no. There is a lot of competition among the domiciles today. Those of us who are in this for the economic development are keen to attract new captive companies. The difference is, we are not focused on the numbers. Consider this, South Carolina is the third-largest US domicile, as measured by the number of active companies, the second-largest domicile for risk retention groups, the largest domicile for securitisations and the 10th-largest domicile in the world. In 2007, South Carolina had $21.3 billion of direct and assumed premiums, the next closest US domicile was Vermont with about $15.5 billion.

It is nice to pat yourself on the back with big numbers like this, but as I’ve said before, we are more interested in the quality of the companies doing business here, ensuring we have a strong business environment, a well-developed infrastructure and sensible regulation. It doesn’t matter if we are first or 15th in size. The secret to long-term success is three things: quality, quality, quality.

You sound like you are speaking from experience. Could you elaborate?

We’ve had our turn in the barrel. A quick check of our website will give you plenty of reading material on that. We’ve learned from our mistakes and responded to them in a positive way. South Carolina has established performance standards for our captive managers andstepped up our surveillance of new prospective captive owners. This is not to say that we are putting up barriers to entry; rather, we are properly vetting our opportunities to ensure we are licensing the right captive arrangement for the right people.

You mentioned that you want to ensure a well-developed infrastructure. How do you do that?

There are two main challenges for any domicile: attracting top-notch talent to serve as regulators, captive managers and other service providers, and educating and training for the new people coming into the industry.

South Carolina is fortunate in that the majority of the 10 largest captive managers in the world have offices here and all of the service providers that a captive will need have captive practices in the state. The challenge is drawing new people into the industry and training them.

Many years ago, the insurance industry was famous for having insurance universities, where new people joining the industry were immersed in intensive training programmes. Underwriting, loss prevention, claims-handling, risk management and sales techniques were all taught through comprehensive programmes developed and offered through some of the largest insurers. Now, virtually all of these insurance schools are either gone or are mere shadows of their former existence.

The captive industry faces the same situation. How do you attract bright, young people into the industry and how do you give them the training to be successful?

We have spent a lot of time thinking about this and have developed some solutions based on the same ideas that were prevalent 30 years ago.

"It is nice to pat yourself on the back with big numbers, but we are more interested in the quality of the companies doing business here, ensuring we have a strong business environment, a well-developed infrastructure and sensible regulation."

The department is working with the University of South Carolina to offer internships and co-op assignments to students with accounting or finance degrees. The idea is to expose them to the workings of an insurance department and provide them with real-world experience and training in regulation. This utilises all of their course work in accounting and finance, as well as giving them a grounding in the insurance business and captive industry. The department is able to benefit from having additional staff members to help us do our work, and the students gain knowledge of the industry. The captive community will benefit because some of those students will take full-time positions in the department and use their knowledge to be more productive at a faster pace. Those who choose not to take a position with the department may find a position in the captive industry as a result of what they learned working with us. In simple terms, it is building a ‘farm team’ for the department and the captive industry in South Carolina. I see it as a win for everyone.

What about those who are in the captive industry currently? Is there anything you plan to offer them?

Yes. In fact, we are working with several groups in the state to offer educational programmes for those currently in the captive industry. The programmes vary in format and venue but include ‘lunch & learns’, educational seminars after a monthly networking meeting, new captive industry employee orientations and, of course, our annual educational conference. We also offer our department staff a career development programme that provides department-paid educational programmes for industry and regulator designations.

As you can see, we are working very hard to attract new talent to the industry and to raise the bar of professionalism with the current practitioners and the department staff as well.

In summing up, how would you describe the state of the captive industry and South Carolina?

There are challenges to the captive industry today that we have never experienced at the same time before. Pricing in the insurance marketplace is relatively soft, investment income is relatively low and letters of credit tend to be expensive. While this has kept some companies on the fence, we are seeing more and more activity as the economy begins to stabilise and recovery takes hold. We receive numerous inquires every month from companies that are moving ahead with their captive plans and want to discuss business plans and investigate domiciles. We are seeing continued interest in forming healthcare captives, employee benefits in captives, and redomiciliations, mostly offshore to onshore. As the economic recovery continues, you will see increased activity in the formation of risk retention groups and protected cell companies, and we may even see some securitisations take place. I think all domiciles will benefit from the improving economy, and South Carolina is expecting another good year as well.

Jeff Kehler is the alternative risk transfer services program manger at the South Carolina Department of Insurance. He can be contacted at: jkehler@doi.sc.gov

Scott Richardson is the director of the South Carolina Department of Insurance. He can be contacted at: srichardson@doi.sc.gov