South Carolina Captive Law Amended 2004

Article 1 – Captive Insurance Companies

Section 38–90–10. Definitions.

As used in this chapter, unless the context requires otherwise:

(1) “Alien captive insurance company” means an insurance company formed to write insurance business for its parents and affiliates and licensed pursuant to the laws of an alien jurisdiction which imposes statutory or regulatory standards in a form acceptable to the director on companies transacting the business of insurance in such jurisdiction.

(2) “Affiliated company” means a company in the same corporate system as a parent, an industrial insured, or a member organization by virtue of common ownership, control, operation, or management.

(3) “Association” means a legal association of individuals, corporations, limited liability companies, partnerships, political subdivisions, or associations that has been in continuous existence for at least one year:

(a) the member organizations of which collectively, or which does itself:

(i) own, control, or hold with power to vote all of the outstanding voting securities of an association captive insurance company incorporated as a stock insurer or organized as a limited liability company; or

(ii) have complete voting control over an association captive insurance company organized as a mutual insurer; or

(b) the member organizations of which collectively constitute all of the subscribers of an association captive insurance company formed as a reciprocal insurer.

(4) “Association captive insurance company” means a company that insures risks of the member organizations of the association and their affiliated companies.

(5) “Branch business” means any insurance business transacted by a branch captive insurance company in this State.

(6) “Branch captive insurance company” means an alien captive insurance company licensed by the director to transact the business of insurance in this State through a business unit with a principal place of business in this State.

(7) “Branch operations” means any business operations of a branch captive insurance company in this State.

(8) “Captive insurance company” means a pure captive insurance company, association captive insurance company, captive reinsurance company, sponsored captive insurance company, special purpose captive insurance company, or industrial insured captive insurance company formed or licensed under this chapter. For purposes of this chapter, a branch captive insurance company must be a pure captive insurance company with respect to operations in this State, unless otherwise permitted by the director.

(9) “Captive reinsurance company” means a reinsurance company that is formed or licensed pursuant to this chapter and is wholly owned by a qualifying reinsurance parent company. A captive reinsurance company is a stock corporation.

(10) “Consolidated debt to total capital ratio” means the ratio of the sum of (a) all debts and hybrid capital instruments including, but not limited to, all borrowings from banks, all senior debt, all subordinated debts, all trust preferred shares, and all other hybrid capital instruments that are not included in the determination of consolidated GAAP net worth issued and outstanding to (b) total capital, consisting of all debts and hybrid capital instruments as described in subitem (a) plus owners’ equity determined in accordance with GAAP for reporting to the United States Securities and Exchange Commission.

(11) “Consolidated GAAP net worth” means the consolidated owners’ equity determined in accordance with GAAP for reporting to the United States Securities and Exchange Commission.

(12) “Controlled unaffiliated business” means a company:

(a) that is not in the corporate system of a parent and affiliated companies;

(b) that has an existing contractual relationship with a parent or affiliated company; and

(13) “Director” means the Director of the South Carolina Department of Insurance or the director’s designee.

(14) “Department” means the South Carolina Department of Insurance.

(15) “GAAP” means generally accepted accounting principles.

(16) “Industrial insured” means an insured as defined in Section 38–25–150(8).

(17) “Industrial insured captive insurance company” means a company that insures risks of the industrial insureds that comprise the industrial insured group and their affiliated companies.

(18) “Industrial insured group” means a group that meets either of the following criteria:

(a) a group of industrial insureds that collectively:

(i) own, control, or hold with power to vote all of the outstanding voting securities of an industrial insured captive insurance company incorporated as a stock insurer or limited liability company; or

(ii) have complete voting control over an industrial insured captive insurance company incorporated as a mutual insurer; or

(b) a group which is created under the Liability Risk Retention Act of 1986 15 U.S.C. Section 3901, et seq., as amended, and Chapter 87, Title 38, as a corporation or other limited liability association taxable as a stock insurance company or a mutual insurer under this title.

(19) “Member organization” means any individual, corporation, limited liability company, partnership, or association that belongs to an association.

(20) “Parent” means any corporation, limited liability company, partnership, or individual that directly or indirectly owns, controls, or holds with power to vote more than fifty percent of the outstanding voting interests of a captive insurance company.

(21) “Participant” means an entity as defined in Section 38–90–230, and any affiliates of that entity, that are insured by a sponsored captive insurance company, where the losses of the participant are limited through a participant contract to the assets of a protected cell. (22) “Participant contract” means a contract by which a sponsored captive insurance company insures the risks of a participant and limits the losses of the participant to the assets of a protected cell.

(22) “Protected cell” means a separate account established and maintained by a sponsored captive insurance company for one participant.

(23) “Pure captive insurance company” means a company that insures risks of its parent, affiliated companies, controlled unaffiliated business, or a combination thereof.

(24) “Qualifying reinsurer parent company” means a reinsurer authorized to write reinsurance by this State and that has a consolidated GAAP net worth of not less than five hundred million dollars and consolidated debt to total capital ratio not greater than 0.50.

(25) “Special purpose captive insurance company” means a captive insurance company 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.

(26) “Sponsor” means an entity that meets the requirements of Section 38–90–220 and is approved by the director to provide all or part of the capital and surplus required by applicable law and to organize and operate a sponsored captive insurance company.

(27) “Sponsored captive insurance company” means a captive insurance company:

(a) in which the minimum capital and surplus required by applicable law is provided by one or more sponsors;

(b) that is formed or licensed under this chapter;

(d) that segregates each participant’s liability through one or more protected cells.

(28) “Treasury rates” means the United States Treasury strips asked yield as published in the Wall Street Journal as of a balance sheet date.

Section 38–90–20. Licensing; required information and documentation; fee; renewal.

(A) A captive insurance company, when permitted by its articles of incorporation, articles of organization, operating agreement, or charter, may apply to the director for a license to do any and all insurance, except workers’ compensation insurance, authorized by this title; however:

(1) a pure captive insurance company may not insure any risks other than those of its parent, affiliated companies, controlled unaffiliated business, or a combination of them;

(2) an association captive insurance company may not insure any risks other than those of the member organizations of its association and their affiliated companies;

(3) an industrial insured captive insurance company may not insure any risks other than those of the industrial insureds that comprise the industrial insured group and their affiliated companies;

(4) in general, a special purpose captive insurance company only may insure the risks of its parent. Notwithstanding any other provisions of this chapter, a special purpose captive insurance company may provide insurance or reinsurance, or both, for risks as approved by the director;

(5) a captive insurance company may not provide personal motor vehicle or homeowner’s insurance coverage or any component of these coverages;

(6) a captive insurance company may not accept or cede reinsurance except as provided in Section 38–90–110.

(B) To conduct insurance business in this State a captive insurance company shall:

(1) obtain from the director a license authorizing it to conduct insurance business in this State;

(2) hold at least one board of directors meeting, or in the case of a reciprocal insurer, a subscriber’s advisory committee meeting, or in the case of a limited liability company a meeting of the managing board, each year in this State;

(3) maintain its principal place of business in this State, or in the case of a branch captive insurance company, maintain the principal place of business for its branch operations in this State; and

(4) appoint a resident registered agent to accept service of process and to otherwise act on its behalf in this State. In the case of a captive insurance company:

(a) formed as a corporation, a nonprofit corporation, or a limited liability company, whenever the registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the director must be an agent of the captive insurance company upon whom any process, notice, or demand may be served;

(b) formed as a reciprocal insurer, whenever the registered agent cannot with reasonable diligence be found at the registered office of the captive insurance company, the director must be an agent of the captive insurance company upon whom any process, notice, or demand may be served.

(a) formed as a corporation or a nonprofit corporation, shall file with the director a certified copy of its articles of incorporation and bylaws, a statement under oath of its president and secretary showing its financial condition, and any other statements or documents required by the director;

(b) formed as a limited liability company, shall file with the director a certified copy of its articles of organization and operating agreement, a statement under oath by its managers showing its financial condition, and any other statements or documents required by the director;

(i) file with the director a certified copy of the power of attorney of its attorney-in-fact, a certified copy of its subscribers’ agreement, a statement under oath of its attorney-in-fact showing its financial condition, and any other statements or documents required by the director; and

(ii) submit to the director for approval a description of the coverages, deductibles, coverage limits, and rates and any other information the director may reasonably require. If there is a subsequent material change in an item in the description, the reciprocal captive insurance company shall submit to the director for approval an appropriate revision and may not offer any additional kinds of insurance until a revision of the description is approved by the director. The reciprocal captive insurance company shall inform the director of any material change in rates within thirty days of the adoption of the change.

(2) In addition to the information required by item (1), an applicant captive insurance company shall file with the director evidence of:

(a) the amount and liquidity of its assets relative to the risks to be assumed;

(b) the adequacy of the expertise, experience, and character of the person or persons who will manage it;

(d) the adequacy of the loss prevention programs of its parent, member organizations, or industrial insureds as applicable; and

(e) such other factors considered relevant by the director in ascertaining whether the proposed captive insurance company will be able to meet its policy obligations.

(3) In addition to the information required by items (1) and (2) an applicant sponsored captive insurance company shall file with the director:

(a) a business plan demonstrating how the applicant will account for the loss and expense experience of each protected cell at a level of detail found to be sufficient by the director, and how it will report the experience to the director;

(b) a statement acknowledging that all financial records of the sponsored captive insurance company, including records pertaining to any protected cells, must be made available for inspection or examination by the director;

(d) evidence that expenses will be allocated to each protected cell in an equitable manner.

(4) Information submitted pursuant to this section is confidential as provided in Section 38–90–35 except that information is discoverable by a party in a civil action or contested case to which the captive insurance company that submitted the information is a party upon a specific finding by the court that:

(a) the captive is a necessary party to the action and not joined only for the purposes of evading the confidentiality provisions of this Chapter;

(b) the information sought is relevant, material to, and necessary for the prosecution or defense of the claim asserted in the litigation; and

(D) (1) A captive insurance company shall pay to the department a nonrefundable fee of two hundred dollars for processing its application for license. In addition, the director may retain legal, financial, and examination services from outside the department to examine and investigate the application, the reasonable cost of which may be charged against the applicant or the director may use internal resources to examine and investigate the application for a fee of two thousand four hundred dollars.

(2) Section 38–13–60 applies to examinations, investigations, and processing conducted pursuant to the authority of this section.

(3) In addition, a captive insurance company shall pay a license fee for the year of registration of three hundred dollars and an annual renewal fee of five hundred dollars.

(4) The department may charge a fifteen-dollar fee for any document requiring certification of authenticity or the signature of the director or his designee.

(E) If the director is satisfied that the documents and statements filed by the captive insurance company comply with the provisions of this chapter, the director may grant a license authorizing the company to do insurance business in this State until March first at which time the license may be renewed.

(F) A foreign or alien captive insurance company, upon approval of the director or his designee, may become a domestic captive insurance company by complying with all of the requirements of law relative to the organization and licensing of a domestic captive insurance company of the same or equivalent type in this State and by filing with the Secretary of State its articles of association, charter, or other organizational document, together with appropriate amendments to them adopted in accordance with the laws of this State bringing those articles of association, charter, or other organizational document into compliance with the laws of this State, along with a certificate of general good issued by the director. After this is accomplished, the captive insurance company is entitled to the necessary or appropriate certificates and licenses to continue transacting business in this State and is subject to the authority and jurisdiction of this State. In connection with this redomestication, the director may waive any requirements for public hearings. It is not necessary for a company redomesticating into this State to merge, consolidate, transfer assets, or otherwise engage in any other reorganization, other than as specified in this section.

Section 38–90–25. Captive reinsurance companies.

(A) A captive reinsurance company, if permitted by its articles of incorporation or charter, may apply to the director for a license to write reinsurance covering property and casualty insurance or reinsurance contracts. A captive reinsurance company authorized by the director may write reinsurance contracts covering risks in any state.

(B) To conduct business in this State, a captive reinsurance company shall:

(1) obtain from the director a license authorizing it to conduct business as a captive reinsurance company in this State;

(2) hold at least one board of directors’ meeting each year in this State;

(3) maintain its principal place of business in this State; and

(4) appoint a registered agent to accept service of process and act otherwise on its behalf in this State.

(1) a certified copy of its charter and bylaws;

(2) a statement under oath of its president and secretary showing its financial condition; and

(3) other documents required by the director.

(D) In addition to the information required by subsection (C), the applicant captive reinsurance company shall file with the director evidence of:

(1) the amount and liquidity of its assets relative to the risks to be assumed;

(2) the adequacy of the expertise, experience, and character of the person who manages it;

(3) the overall soundness of its plan of operation; and

(4) other overall factors considered relevant by the director in ascertaining if the proposed captive reinsurance company is able to meet its policy obligations.

(E) Information submitted pursuant to this section is confidential as provided in Section 38–90–35, except that information is discoverable by a party in a civil action or contested case to which the captive insurance company that submitted the information is a party, upon a finding by the court that:

(1) the captive is a necessary party to the action and not joined only for the purposes of evading the confidentiality provisions of this chapter;

(2) the information sought is relevant, material to, and necessary for the prosecution or defense of the claim asserted in the litigation; and

(3) the information sought is not available from any other source.

Section 38–90–30. Adoption of name.

A captive insurance company may not adopt a name that is the same as, deceptively similar to, or likely to be confused with or mistaken for any other existing business name registered in this State.

Section 38–90–35. Confidential Information.

Information submitted pursuant to the provisions of this chapter is confidential and may not be made public by the director or an agent or employee of the director without the written consent of the company, except that:

(1) information may be discoverable by a party in a civil action or contested case to which the submitting captive insurance company is a party, upon a showing by the party seeking to discover the information that:

(a) the information sought is relevant to and necessary for the furtherance of the action or case;

(b) the information sought is unavailable from other nonconfidential sources; or

(c) a subpoena issued by a judicial or administrative law officer of competent jurisdiction has been submitted to the director; and

(2) the director may disclose the information to the public officer having jurisdiction over the regulation of insurance in another state if:

(a) the public official agrees in writing to maintain the confidentiality of the information; and

(b) the laws of the state in which the public official serves require the information to be confidential.

Section 38–90–40. Capitalization requirements; security requirements for branch captive insurance companies; restriction on payment of dividends.

(A) (1) The director may not issue a license to a captive insurance company unless the company possesses and maintains unimpaired paid-in capital of:

(i) in the case of a pure captive insurance company, not less than one hundred thousand dollars;

(ii) in the case of an association captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than four hundred thousand dollars;

(iii) in the case of an industrial insured captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than two hundred thousand dollars;

(iv) in the case of a sponsored captive insurance company, not less than five hundred thousand dollars; however, if the sponsored captive insurance company does not assume any risk, the risks insured by the protected cells are homogeneous and there are no more than ten cells, the director may reduce this amount to an amount not less than one hundred fifty thousand dollars;

(v) in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company’s business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

(2) (a) Except for a sponsored captive insurance company that does not assume any risk, the capital must be in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State or as approved by the director.

(b) For a sponsored captive insurance company that does not assume any risk, the capital also may be in the form of other high quality securities as approved by the director.

(B) (1) The director may not issue a license to a captive insurance company incorporated as a nonprofit corporation unless the company possesses and maintains unrestricted net assets of:

(i) in the case of a pure captive insurance company, not less than two hundred fifty thousand dollars; and

(ii) in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company's business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

(2) Contributions to a captive insurance company incorporated as a nonprofit corporation must in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State or as approved by the director.

(C) The director may prescribe additional capital or net assets based upon the type, volume, and nature of insurance business transacted. Contributions in connection with these proscribed additional net assets or capital may be in the form of an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State or as approved by the director.

(D) In the case of a branch captive insurance company, as security for the payment of liabilities attributable to branch operations, the director shall require that a trust fund, funded by an irrevocable letter of credit or other acceptable asset, be established and maintained in the United States for the benefit of United States policyholders and United States ceding insurers under insurance policies issued or reinsurance contracts issued or assumed, by the branch captive insurance company through its branch operations. The amount of the security may be no less than the capital and surplus required by this chapter and the reserves on these insurance policies or reinsurance contracts, including reserves for losses, allocated loss adjustment expenses, incurred but not reported losses and unearned premiums with regard to business written through branch operations; however, the director may permit a branch captive insurance company that is required to post security for loss reserves on branch business by its reinsurer to reduce the funds in the trust account required by this section by the same amount so long as the security remains posted with the reinsurer. If the form of security selected is a letter of credit, the letter of credit must be established by, or issued or confirmed by, a bank chartered in this State or a member bank of the Federal Reserve System.

(E) (1) A captive insurance company may not pay a dividend out of, or other distribution with respect to, capital or surplus, in excess of the limitations set forth in Section 38–21–250 through Section 38–21–270, without the prior approval of the director. Approval of an ongoing plan for the payment of dividends or other distributions must be conditioned upon the retention, at the time of each payment, of capital or surplus in excess of amounts specified by, or determined in accordance with formulas approved by, the director.

(2) A captive insurance company incorporated as a nonprofit corporation may not make any distributions without the prior approval of the director.

(F) An irrevocable letter of credit, which is issued by a financial institution other than a bank chartered by this State or a member bank of the Federal Reserve System, shall meet the same standards as an irrevocable letter of credit which has been issued by either entity.

Section 38–90–45. Minimum capitalization or reserves.

(A) The director may not issue a license to a captive reinsurance company unless the company possesses and maintains capital or free surplus of not less than the greater of three hundred million dollars or ten percent of reserves. The surplus may be in form of cash or securities.

(B) The director may prescribe additional capital or surplus based upon the type, volume, and nature of the insurance business transacted.

(C) A captive reinsurance company may not pay a dividend out of, or other distribution with respect to, capital or surplus in excess of the limitations, without the prior approval of the director. Approval of an ongoing plan for the payment of dividends or other distributions must be conditioned upon the retention, at the time of each payment, of capital or surplus in excess of amounts specified by, or determined in accordance with formulas approved by, the director.

Section 38–90–50. Free surplus requirements; restriction on payment of dividends.

(A) (1) The director may not issue a license to a captive insurance company unless the company possesses and maintains free surplus of:

(i) in the case of a pure captive insurance company, not less than one hundred fifty thousand dollars;

(ii) in the case of an association captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than three hundred fifty thousand dollars;

(iii) in the case of an industrial insured captive insurance company incorporated as a stock insurer or organized as a limited liability company, not less than three hundred thousand dollars;

(iv) in the case of an association captive insurance company incorporated as a mutual insurer, not less than seven hundred fifty thousand dollars;

(v) in the case of an industrial insured captive insurance company incorporated as a mutual insurer, not less than five hundred thousand dollars;

(vi) in the case of a sponsored captive insurance company, not less than five hundred thousand dollars; and

(vii) in the case of a special purpose captive insurance company, an amount determined by the director after giving due consideration to the company’s business plan, feasibility study, and pro-formas, including the nature of the risks to be insured.

(2) (a) Except for a sponsored captive insurance company that does not assume any risk, the surplus must be in the form of cash, cash equivalent, or an irrevocable letter of credit issued by a bank chartered by this State or a member bank of the Federal Reserve System with a branch office in this State and approved by the director.

(b) For a sponsored captive insurance company that does not assume any risk, the surplus also may be in the form of other high quality securities as approved by the director.

(B) Notwithstanding the requirements of subsection (A) a captive insurance company organized as a reciprocal insurer under this chapter may not be issued a license unless it possesses and thereafter maintains free surplus of one million dollars.

(C) The director may prescribe additional surplus based upon the type, volume, and nature of insurance business transacted. This capital may be in the form of an irrevocable letter of credit issued by a bank chartered by this State, or a member bank of the Federal Reserve System with a branch in this State or as approved by the director.

(D) A captive insurance company may not pay a dividend out of, or other distribution with respect to, capital or surplus in excess of the limitations set forth in Section 38–21–270, without the prior approval of the director. Approval of an ongoing plan for the payment of dividends or other distribution must be conditioned upon the retention, at the time of each payment, of capital or surplus in excess of amounts specified by, or determined in accordance with formulas approved by, the director.

(E) An irrevocable letter of credit, which is issued by a financial institution other than a bank chartered by this State or a member bank of the Federal Reserve System, shall meet the same standards as an irrevocable letter of credit which has been issued by either entity.

Section 38–90–55. Incorporation of a captive reinsurance company.

(A) A captive reinsurance company must be incorporated as a stock insurer with its capital divided into shares and held by its shareholders.

(B) A captive reinsurance company may not have fewer than three incorporators of whom at least two must be residents of this State.

(C) Before the articles of incorporation are transmitted to the Secretary of State, the incorporators shall petition the director to issue a certificate finding that the establishment and maintenance of the proposed corporation promotes the general good of this State. In arriving at this finding the director shall consider:

(1) the character, reputation, financial standing, and purposes of the incorporators;

(2) the character, reputation, financial responsibility, insurance experience, and business qualifications of the officers and directors; and

(3) other factors the director considers advisable.

(D) The capital stock of a captive reinsurance company must be issued at par value or greater.

(E) At least one of the members of the board of directors of a captive reinsurance company incorporated in this State must be a resident of this State.

Section 38–90–60. Incorporation options and requirements.

(A) A pure captive insurance company or a sponsored captive insurance company may be:

(1) incorporated as a stock insurer with its capital divided into shares and held by the stockholders; or

(2) incorporated as a public benefit, mutual benefit, or religious nonprofit corporation with members in accordance with the South Carolina Nonprofit Corporation Act of 1994; or

(3) organized as a limited liability company with its capital divided into capital accounts and held by its members.

(B) An association captive insurance company or an industrial insured captive insurance company may be:

(1) incorporated as a stock insurer with its capital divided into shares and held by the stockholders;

(2) organized as a limited liability company with its capital divided into capital accounts and held by its members;

(3) incorporated as a mutual insurer without capital stock, the governing body of which is elected by the member organizations of its association; or

(4) organized as a reciprocal insurer in accordance with Chapter 17.

(C) A captive insurance company may not have fewer than three incorporators or organizers of whom not fewer than two must be residents of this State.

(D) In the case of a captive insurance company formed as a corporation, a nonprofit corporation, or a limited liability company, before the articles of incorporation or articles of organization are transmitted to the Secretary of State, the incorporators or organizers shall petition the director to issue a certificate setting forth a finding that the establishment and maintenance of the proposed entity will promote the general good of the State. In arriving at this finding the director shall consider:

(1) the character, reputation, financial standing, and purposes of the incorporators or organizers;

(2) the character, reputation, financial responsibility, insurance experience, and business qualifications of the officers and directors or managers; and

(3) other aspects as the director considers advisable.

(E) The articles of