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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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North Carolina’s Captive Insurance Law Fuels Rapid Captive Growth

North Carolina Flag Against Blue Sky and Clouds
July 21, 2017

North Carolina's captive insurance program’s rapid growth is turning heads, both nationally and globally.

North Carolina Insurance Commissioner Mike Causey said businesses are finding the state’s thorough but fair regulation a plus when it comes time to select a jurisdiction to domicile a captive insurance company.

"Our captive law provides for low formation and operations costs," Mr. Causey said. "Our customer service is second to none."

A new analysis by the North Carolina Department of Insurance indicates that the captive insurance industry made a $23 million impact on the state in 2016. The state joins four other states on the short list competing for an award to be the top US Captive Domicile. The award will be presented in Burlington, Vermont, on Aug. 7, 2017.

In a chart compiled by Strategic Risk Solutions, and the International Risk Management Institute, Inc., reported that North Carolina had a 102.1 percent increase in captive insurance companies from 2015 to 2016. This increase significantly exceeded any other US state domicile for the same period.

Captive insurance is a formalized self-insurance program that many businesses use as a means of managing their risks. The North Carolina General Assembly enacted the state's captive insurance law in 2013. Since then, the North Carolina Department of Insurance estimates that the state’s favorable business environment for captive insurers has brought 60 new jobs to the state.

The economic impact of captives has grown each year during the first 3 years of the program in the state. In 2014, the economic impact of captives was $2.5 million. In 2015, the impact was $15.3 million.

The economic impact estimate is based on the premium taxes paid to the state by licensed captive insurers and by service provider and hospitality revenues generated by North Carolina businesses that serve the insurers.

The state’s captive regulatory team of 11 includes knowledgeable professionals, certified public accountants (CPAs), and in-house actuaries and is led by Debbie Walker, deputy insurance commissioner.

Ms. Walker emphasizes that her team provides timely, responsive regulation for captive insurers. License applications are typically evaluated within 2-to-4 weeks. During periods of high volume, the North Carolina Department of Insurance is able to reallocate some of its other personnel to assist the captive program and help keep up with demand.

During the 2017 legislative session, the North Carolina General Assembly approved funding for three additional positions to help the department with its oversight and development of the captive insurance market.

Businesses being insured by captives do not have to be located in North Carolina. However, if their captive insurance company is domiciled in North Carolina, either the company’s board of directors must meet in the state at least once annually or the captive insurer must use at least two service providers—such as CPAs, attorneys, or actuaries—from North Carolina.

The term "captive" originated when an Ohio business used mines solely for its operations. The mines were "captive," solely for one business. The agent who developed the concept of an insurer that would insure only the risks of its parent, the Ohio business, is credited with forming the first pure "captive" insurer.

Ms. Walker said businesses may want to form captive insurance companies for a number of reasons, including the ability to reduce premiums. Because the premium charged by the captive insurer is based only on the insured's risks, the captive insurer's premium may be lower than the premium charged by the traditional marketplace. Or there could be gaps in coverage in a traditional insurance policy of a business that could be covered by a captive insurer. For instance, traditional insurance coverage may not be available for certain risks of a business or the terms and conditions of traditional policies may include exclusions and limitations. The captive insurer may be used to issue policies for risks not covered by the traditional marketplace or to insure those gaps in coverage due to exclusions and limitations in the traditional policies.

State law prohibits captive insurance companies from directly providing personal motor vehicle, homeowners, accident and health, workers compensation, employer's liability, and life insurance or annuities.

While providing for adequate oversight, North Carolina's captive insurance law offers flexibility for a captive insurer in the state. "The law provides the commissioner with discretion to regulate each captive insurer based on its risk profile while also eliminating duplication," Ms. Walker said. For example, a captive insurer may not be required to file an annual report with the department if the company meets certain independent audit requirements.

Ms. Walker said that more stringent regulation such as that imposed on the traditional insurers isn’t necessary since the general public isn’t being insured by the captive insurance companies. In addition, Ms. Walker said, businesses forming captives are generally more sophisticated consumers.

The Department of Insurance also doesn’t charge fees to its licensed captive insurers (with the exception of the application fee for one type of captive, the special purpose financial captive), providing another incentive for such companies to domicile in North Carolina. State law does require captive insurers to pay a premium tax. They also must pay a fee to the secretary of state's office when they incorporate and a small fee annually.

To be domiciled in North Carolina, a captive insurance company must maintain a principal place of business in the state and have a registered agent in the state. Only about 7 percent of the businesses forming captives are from North Carolina, Ms. Walker said.

Captive managers, which run the captive insurance companies, do not have to be located in North Carolina. However, the managers have to be approved by the North Carolina Department of Insurance.

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