Building on experience

Was this an industry initiative or did the impetus come primarily from the regulatory side?

The bill was developed and presented to the legislature by the South Carolina Captive Insurance Association (SCCIA), but in truth it was a joint effort in which the department’s captives division played a very active supporting role.

From the outset I wanted this bill to be the product of a close collaboration between some of the leading figures in the state’s captives industry on one side and those departmental personnel with the most in-depth knowledge of the captive statute on the other.

This was the spirit in which the project was launched and carried out, and it turned out to be a very constructive, collegial, and rewarding exercise for all who participated.

What led the SCCIA and the department to seek changes to the captives statute at this point?

Given that a fairly substantial set of amendments was passed in June 2014, which among other things permitted the formation and licensing of incorporated cells within sponsored captive structures, this more recent effort was driven primarily by two factors.

The first is the fact that we now have 18 years of practical experience in administering this statute. Some of our staff, as well as some of the industry’s leading practitioners, know this statute inside and out, and know what parts of it facilitate the smooth and efficient administration of our captives programme—and thereby lend credibility to the programme—and which parts do not.

The second factor is the ever-increasing competition among states to attract captives business. States that aspire to be leading captives jurisdictions over the long term need to continually refresh their statutes in light of competitive factors as well as practical business considerations.

What does the new legislation do? Is it a major overhaul of your captives statute?

It is not a fundamental substantive re-working of our statutory framework, nor does it signal a change of direction in our department’s policies and practices overall. It certainly does not represent a lowering of our regulatory standards or an abandonment of our insistence on quality captive insurance programmes together with well-informed and committed owners.

The new legislation essentially does three things:

It introduces needed clarifications and eliminates redundancies.

It removes provisions which are outdated and not in keeping with the principle of proportionality that should define and govern any domicile’s regulatory approach to captives.

It seeks to align the statute with departmental policies and practices that have evolved to a higher level of administrative efficiency over time, and thus enhance our competitive appeal as a domicile.

Describe the provisions in the legislation that you and the SCCIA would like captive owners, prospects, and practitioners to know about.

Here’s a quick run-down of the 10 most salient changes:

The definitions of “affiliate”, “control”, and “person” have been revised to conform to the South Carolina Holding Company Regulatory Act.

The definition of “principal place of business” has been revised to mean “the place physically located within the state of South Carolina where the complete books and records of the captive company are available for examination by the director”. The new definition eliminates any requirement for the captive (via its manager) to have a physical office within the state, which we had found to be a deterrent to new business.

The definition of “pure” captive has been revised to provide that pure captives are permitted to participate in risk pools and to take credit for reinsurance recoverable from an approved risk pool.

The statutory distinction between paid-in capital and unencumbered surplus has been eliminated, resulting in a set of single combined capital-and-surplus statutory minimum requirements.

The minimum capitalisation for a sponsored captive has been reduced to $250,000 total from $1,000,000 (capital and surplus [C&S] combined), which was neither necessary nor commercially realistic. Additionally, the new statutory wording clarifies that premium taxes for sponsored companies with unincorporated cells are aggregated at the sponsored entity level rather than applying at the cell level, for simplicity and ease of tax reporting.

The deadline for annual statutory financial filings for non-risk retention group (non-RRG) captives has been changed from March 1 to “before July 1”—ie, June 30. The deadline for RRG filings remains March 1. The change for non-RRGs should be very welcome news for managers, accountants, and actuaries, who have always been pressed to complete their respective workstreams under the former deadline.

A captive that is not an RRG or an industrial insured captive “shall be examined three years following the date of licensure and thereafter only at the discretion of the director”. This is a new provision that replaces the former requirement that such captives be examined at least every five years following the first examination post-licensure. With respect to any category of captive, including RRGs, the examination need not include a physical visit by the director or his or her designee, but can be a “desk audit”.

This change should spare captives unnecessary expense and spare managers work that arguably produces no value.

1. The categories of “captive reinsurance company” and “coastal captive insurance company” have been eliminated, as any company falling under the former definitions of either of those types of captive can be licensed as a special purpose captive.
2. Approval of a loan from a captive to a captive’s parent or affiliate(s) no longer requires a director’s order. The previous requirement for a director’s order was an anomaly and has been eliminated.
3. The new wording clarifies that the first annual board meeting must be held within the state of South Carolina within the calendar year immediately succeeding the year of licensure and once every calendar year thereafter. This gives owners of newly licensed companies a break.

In addition to the above 10 changes, the new legislation contains language that reinforces a fundamental principle that has been part of our statute since its inception in 2000, namely, that no part of the State’s Insurance Code (Title 38) and no regulations promulgated thereunder apply to captives other than those contained or specifically referenced in Chapter 90, which is the chapter expressly and exclusively related to captives.

What do you expect the impact of these changes to be?

The most immediate impact will be an improvement in the practical workings of our department’s captives division and of numerous industry practitioners from various professional disciplines. I should point out that in addition to the 10 specific provisions highlighted above, there are a lot of “nuts and bolts” clean-up features in this bill which will help rationalise and streamline work.

With this new legislation, our captives statute has now been comprehensively fine-tuned, brought up to date, and harmonised with the enhanced policies and practices we have developed over time with the benefit of almost two decades of varied and valuable experience.

With this legislation South Carolina has made another unequivocal statement of commitment to the captives industry—especially to the captive owners and practitioners who have chosen to make South Carolina their captive home and those considering doing so.

It signifies that we fully intend to be a leading player among onshore captive insurance domiciles for a long time to come.

It also implicitly conveys our commitment to bring more of a private sector mindset to our regulatory work than may be found in other domiciles. Naturally, this means that we place a high value on efficiency, but more than that, it shows that we insist on having good reasons for the things we do.

We need to question everything and be prepared to justify the why and how of everything we do. While I believe this to be true in organisational life generally, it is especially necessary in a regulatory setting.

Jay Branum is the director of captives in the South Carolina Department of Insurance. He can be contacted at: jbranum@doi.sc.gov