Tuesday, May 21, 2024

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Domicile Wars: Special purpose captives, regulatory autonomy benefits South Carolina’s proposition

  • Early entrant into US captive market has resulted in sophisticated captive infrastructure
  • Special purpose captives gives regulator and owners flexibility
  • State has not targeted local businesses for re-domestications
  • Branch captives under discussion for future legislation

The proficiency and autonomous nature of the captive division is one of the mains reasons South Carolina has become a popular domicile option in the United States, according to regulators and local industry professionals.

The State benefited from being one of the early adopters of captive legislation in the United States, with its 2001 law coinciding with the beginning of a hard commercial insurance market.

South Carolina has gradually expanded its regulation over the past 22 years, with special purpose captive insurance companies proving to be a popular solution for prospects looking for nuanced programmes.

“There was only really Vermont, Hawaii and South Carolina at the time, so there was not a plethora of choice,” Gary Osborne, vice president at Risk Partners, told Captive Intelligence, when reflecting on the domicile’s beginnings.

At the end of 2022, there was 208 captives licenced in South Carolina. Captive Intelligence understands that there have been 10 new captives formed in the State in 2023.

“Even though some South Carolina captives have been consolidated or shut down for various reasons, the domicile has just continued to grow and add to its numbers,” said Laura Rodrigo, managing director at Strategic Risk Solutions (SRS).

Rodrigo revealed that the first Mexican captive was formed in the State last year.

“We formed a reinsurance captive in South Carolina for Mexico’s largest insurance company, so that was quite a feat for both the South Carolina Department of Insurance (SCDOI) and SRS,” she said.

Rodrigo also said there had been a general uptick in captive interest in the State from companies outside the US, “which really says a lot”.

One of the biggest challenges facing the domicile as it continues to attract new captives is the replenishment of talent.

“I would think that for all service providers, including SRS, the biggest struggle with growth is staffing,” Rodrigo said.

Joe McDonald, director of captives at the SCDOI, said that if South Carolina can keep “knowledgeable and well-informed” regulatory staff, the domicile will continue to have stability for the industry, “and that’s what owners and captive companies want”.

Rodrigo also highlighted that the current Internal Revenue Service (IRS) battle against 831(b) captives is causing minor challenges for the State.

“Luckily for South Carolina, we’ve never been a state that’s been heavy and pro 831(b) formations,” she added. 

Those wanting to set up a captive in the State are generally looking at around 30 days for the application to be completed.

“We have a captive that’s going to have taken close to 90 days, but there’s been a few challenges and we’ve had to go back and forward a few times, but that’s unusual,” Osborne said.

Property and auto insurance are the most common risks in the State’s captives, which Osborne said accounted for around 80% of captive risk written in South Carolina.

“I’m also seeing a little activity in workers’ compensation, which I had not previously seen for the past five years because the market was soft,” he added.

He noted that captives are being utilised to write some cyber and professional liability, “and we are starting to see a lot of medical stop loss”.

The regulator

The independence of the captive insurance division is one of the main reasons South Carolina is a popular domicile choice for captive owners, according to McDonald.

“A major attraction and reason why companies are coming to South Carolina is because of the autonomous captive division we have,” he said.

The State benefits from the reputation amassed from a 22-year history of consistent regulation.

“After Vermont, South Carolina probably has the most vendors and the most service providers that are physically located in the state, and most companies have some staffing there,” Osborne said.

“It’s not necessarily gigantic, but there is actually reasonable infrastructure, there’s auditors, actuaries and managers all in the State.”

South Carolina profits from having a specific licencing coordinator and business plan change analyst.

The licence coordinator deals with all the administrative requirements and creative aspects of the licencing process.

“And piecing all that together so that we can get into the actual details of a programme more quickly,” McDonald said.

He also said it is helpful to have a business plan change analyst that is dedicated specifically to business plan changes.

“It is good to have that point person so that the companies know who to go to,” McDonald added. “Having a singular person there is great because of the efficiency that that creates, we can turn around business plan changes in 24 to 48 hours.”

Unlike many states in the US, South Carolina does not enforce a self-procurement tax.

“There’s a self-procurement tax rate and form but it’s never been used, and the department doesn’t go after it, and they have never forced businesses in South Carolina to come home,” Rodrigo said.

Rodrigo said growth within South Carolina has simply been because business owners want to work with the “great regulators and the great service providers”.

Despite growth, the State has turned down a number of captive applications this year.

“We want the right kind of company in South Carolina, and we want our regulation and the way we approach regulation to add value to their owners,” McDonald said.

Megan Ogden, chief operating officer at Energy Insurance Services (EIS), told Captive Intelligence the service that the SCDOI provides to its captive owners is “outstanding”. 

EIS is a large cell captive that was founded in Bermuda in 1992, with the company then re-domesticating to South Carolina in 2006.

Ogden said EIS explored all the major domestic domiciles as potential options when moving onshore.

“Joseph McDonald and his team go above and beyond to understand our business and respond to any queries or approval requests in a very timely manner,” Ogden said.

“They have done a wonderful job of maintaining a strong regulatory environment while understanding the strategic goals of alternative risk programmes.”

Legislative changes

The South Carolina captive statute is written in such a way that affords flexibility to the regulators and limits the need for annual reviews.

“It’s unnecessary for us to have annual updates to it, as we are empowered and given the regulatory autonomy needed to attract the right companies and regulate them appropriately,” McDonald said.

It recently introduced changes on aggregating the premium of cell structures, while Captive Intelligence understands there has been early discussions on the introduction of branch legislation.

Previously, if a client had a cell programme with 30 cells and they were all writing lower premiums within the minimum premium tax, they would all be subject to the $5,000 minimum premium tax, as well as 30 different annual statement filings.

“Now it’s aggregated, so there is one annual statement, and then the premium tax is filed at the core level, and it’s based on the total premium so that each cell is not hit with that minimum, and then the maximum tax as well,” Rodrigo said.

“If they’re writing several $100m they are only going to be taxed at the South Carolina max.”

There has also been recent discussion concerning introducing branch legislation in South Carolina.

“That was something we really want to open the door to,” Rodrigo said.

“It didn’t get past this last session and we were not in agreement enough to bring it up, but that’s something that could be introduced down the road.”

Special purpose captives

Special purpose captives have been beneficial to the captive regime in South Carolina and have been useful for a number of companies requiring boutique styled programmes.

Under South Carolina law, a special purpose captive insurance company is defined as one that “is formed or licensed under this chapter that does not meet the definition of any other type of captive insurance company defined in this section”.

Osborne said that one of the reasons special purpose captives were originally introduced was so the State could compete with the options being offered by offshore domiciles.

“In offshore jurisdictions you could do pretty much everything, but domestically there was a lot of limitations,” he said.

He said special purpose captives were based on the idea that if the structure does not fit the other captive categories, but a client can present a good argument that makes business sense, “we can do it”.

“Even things that look like they might be a single parent can end up being special purpose because it allows for different structures and hybrid ownership,” Osborne said.

McDonald noted that the special purpose captives afford the state a lot of flexibility with capitalisation, regulation, as well as other things South Carolina requires for a captive programme.